Germany refers ECB bond buying to European Court
Frankfurt’s Outright Monetary Transactions programme is credited with stabilising euro crisis
A European Union flag flies outside the headquarters of the European Central Bank (ECB) in Frankfurt, Germany, on Wednesday, Jan. 8, 2014. Photograph: Ralph Orlowski/Bloomberg
Germany’s constitutional court will refer a complaint against the European Central Bank’s flagship bond-buying plan to the European Court, removing the prospect of it curbing the programme.
The court said today there was good reason to think the scheme “exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget”.
However, it said in a statement that it “also considers it possible that if the OMT decision were interpreted restrictively” it could conform with the law. Legally, the German court has to offer its own preliminary interpretation of the case to the European Court.
It in turn will use that interpretation as the initial basis for evaluation. The ECB’s Outright Monetary Transactions (OMT) programme, announced by ECB president Mario Draghi in September 2012 at the height of the sovereign debt crisis and as yet unused, is widely credited with stabilising the euro. Any potential curb on it would alarm investors.
The OMT’s power lies in its promise of potentially unlimited sovereign bond purchases - a prospect that provided the necessary backstop to calm fears the euro would fall apart. The euro fell to a session low against the dollar in response while German government bond futures rose to day’s highs and Italian bond yields reversed earlier falls, suggesting some disquiet about the court’s decision.
Although the German court said it saw substantial reasons to suggest the OMT plan exceeds the ECB’s mandate, the European Court has a reputation for giving federalist rulings that take a broad interpretation of European institutions’ powers.
The German court’s decision is a defeat for the Bundesbank, which challenged the legality of the ECB decision in testimony given by its president, Jens Weidmann, last year. The German court said it will rule on the legality of the currency bloc’s permanent bailout scheme, the European Stability Mechanism (ESM), on March 18th.
While the ECB has no immediate need to use the plan, the lack of final clarity over its legality may still crimp its room for manoeuvre on other measures. The central bank has been considering the possibility of suspending operations to soak up money it spent buying sovereign bonds during the euro zone’s debt crisis under its now-terminated Securities Markets Programme.
Ending the so-called “sterilisation” operations would inject about €175 billion of liquidity into the financial system, which would help ease strains in euro zone money markets.