The German Federal Constitutional Court was yesterday scheduled to rule on the legality of a European Central Bank (ECB) emergency bond-buying scheme, a decision that could curb the bank’s crisis-fighting powers and set off a legal battle between the EU and its biggest member.
Conceived at the height of Europe’s debt crisis, the outright monetary transactions (OMT) scheme was launched as part of ECB President Mario Draghi’s pledge to do “whatever it takes” to preserve the euro, giving the bank broad powers to buy the debt of financially strained members.
The European Court of Justice upheld the scheme last summer, but a 35,000-strong group from Germany, including politicians and academics, still want it dismantled, arguing in Germany’s top court that it exceeds the ECB’s mandate and violates German law.
Limiting OMT would not have immediate consequences for the ECB, but it could dent confidence in its ability to tackle crises, raise doubts about the use of any future unconventional tools and strengthen a separate legal challenge over the bank’s 1.74 trillion euro (US$1.97 trillion) asset-buying scheme.
Experts argue that while an outright rejection of OMT is unlikely, the German court could raise objections, asking for some limits on Deutsche Bundesbank’s participation.
Such an outcome could pit Europe’s top court against Germany’s top judges, likely leading to an extended fight over supremacy within the European legal framework.
German think tank Kronberger Kreis said the European court ruling on OMT amounts to what could be seen as a modification of the European treaty, making it difficult for Germany to accept the ruling.
“The European Court of Justice de facto abandons the possibility of a justiciable limitation of the ECB’s competences,” Kronberger Kreis said. “For this reason, the German Federal Constitutional Court cannot follow the ... European court’s reasoning.”
Financial analysts said the biggest impact of any limit on OMT could be on confidence, but that there would be no direct impact on the ECB’s quantitative easing program.
“The confidence of markets in the ECB’s capacity to act would suffer if the German constitutional court reaches the conclusion that the ECB is going beyond its mandate on OMT,” Commerzbank economist Michael Schubert said.
Quantitative easing is designed differently to OMT, so many of the objections would not hold.
Another German group with many of the same members has already launched a challenge against quantitative easing, and the German court is considering whether to hear the case.
While an unfavorable court ruling on OMT might not directly affect the ECB’s quantitative easing program, it could nevertheless raise doubts about its ability to provide even more stimulus. Any expansion of quantitative easing could also bring the central bank up against its own holding limits.
Modifying those limits again would fuel arguments that it is exceeding its mandate, since inflation is falling short of target, yet its stake in government debt keeps rising, analysts said.
“If the [court] effectively clips the wings of OMT, this may raise questions over future scope for further unconventional monetary policies,” Societe Generale economist Michala Marcussen said.
Arguing its case at the court, the ECB said it must be able to decide independently on future monetary policy in order to fulfill its mandate.
The ruling also has the potential to weigh on already strained ties between the ECB and Berlin, which has many times criticized the bank’s stimulus programs, arguing that it is doing more damage than good.
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