The subtle tying of the ECB’s hands is the most worrying outcome of German court decision
Critics of the ECB’s ‘conservatism’ will be dismayed that the German court is likely to scare it off from engaging in more radical policies
European Central Bank (ECB) President Mario Draghi waits to deliver a speech at a conference for the 20th anniversary of the establishment of the European Monetary Institute, in Brussels
It’s almost 18 months since the president of the European Central Bank Mario Draghi unveiled his Outright Monetary Transactions (OMT) programme, the euro zone’s proposal to mop up the bonds of troubled euro zone countries.
The proposal, and Draghi’s commitment to do “whatever it takes” to save the single currency, has been widely credited with calming the euro zone crisis.
Bond yields have narrowed, debt and equity markets across the euro zone have picked up, and the break up of the euro, once a real possibility, now appears remote.
The euro zone crisis, while not quite over, has subsided significantly. The judgment by the German constitutional court threatened to undo these developments.
By placing a question mark over the legality of the ECB’s main policy weapon, the German constitutional court threatened to wake the euro zone crisis from its slumber.
So far, financial markets appear to have taken the announcement in their stride.
After some initial turbulence last Friday, bond and equity markets have settled down in the wake of the judgment.
One of the primary reasons is that the decision to refer the judgment to the European Court of Justice simply continues the uncertainty that already existed around the issue.
Markets knew a judgment was coming; the decision to deflect the ultimate decision to Luxembourg means the question mark that already hung over OMT will continue until the Luxembourg court decides.
The reaction in Brussels and Frankfurt to the decision was predominantly one of relief, as the European Commission and European Central Bank were given a reprieve from any imminent decision on the legality of OMT.
But the Karlsruhe decision has deeper ramifications for the euro zone.
Firstly, the ruling by the court that the process appears incompatible with German law means that the ECB is less likely to actually deploy OMT before the European court rules on the matter.
While cynics point out that OMT has never been used, and that Mario Draghi has skilfully avoided divulging details of how the process might work, the certainty that it could and would be used is what has comforted markets.
Secondly, the Karlsruhe decision is likely to discourage the ECB from engaging in other, more radical non-conventional measures such as quantitative easing.
With the ECB rapidly running out of policy options, having cut interest rates to 0.25 per cent and euro zone inflation refusing to budge from historically low levels of around 0.7 per cent, this is of particular significance at this juncture.
Even the most conservative analysts accept that the traditional option of cutting interest rates is fast disappearing as interest rates go lower, making so-called “non-conventional” measures more likely.