The European Central Bank’s top two German officials gave opposing evidence to the country’s highest court, as judges consider the legality of the ECB’s OMT bond-buying plan.
While Bundesbank President Jens Weidmann argued that bond markets exert discipline on countries’ finances, ECB Executive Board member Joerg Asmussen said the euro area faced break-up last year as investors began to price-in the end of the currency.
“The risk of doing nothing would have been greater,” Asmussen said at the Federal Constitutional Court in Karlsruhe. Weidmann, who voted against the plan last year, told the court that ECB measures may “blur the boundary between European monetary policy and the fiscal policy of individual nation states.”
The pair were called as expert witnesses as the court considers a case brought by lawyers and lawmakers who argue the ECB’s Outright Monetary Transactions program violates European laws and the constitutional principle of democracy. The as-yet unused OMT, which ECB President Mario Draghi has said is the “most successful” central bank tool, foresees bond purchases if countries sign up to economic reforms.
The top court is reviewing seven cases filed over the OMT and the European Stability Mechanism at a two-day hearing.
German Finance Minister Wolfgang Schaeuble and government lawyers asked the judges to throw out the suits. Schaeuble said the judges must respect the central bank’s independence.
“All the ECB’s measures are in line with its mandate,” Schaeuble said. “Germans can’t sue against the ECB measures in the constitutional court. The judges have to reject the cases for that reason without even looking at the merits.”
Dietrich Murswiek, a lawyer for plaintiff and lawmaker Peter Gauweiler, said that the hearing presented “a historic moment.” The ruling in this case “could turn out to be the most significant in decades,” said Murswiek. “Nothing less than the principle of democracy is at stake.”
Ulrich Haede, a law professor representing the German government, said the court should reject the claim against the OMT as inadmissible because the mechanism hasn’t been used yet.
“The ECB’s announcement so far hasn’t been turned into a formal act, so you cannot sue against it yet,” Haede said.
Murswiek countered that with the mere announcement of the OMT, the ECB is acting in line with previous bond-purchase progams, and that’s enough to file a suit.
The plaintiffs include the opposition Left Party, the only bloc in Germany’s lower house to consistently vote against euro-area bailouts, and political group Mehr Demokratie e.V., German for “More Democracy.” Gauweiler is a lawmaker from the CSU, Bavarian sister party to Merkel’s Christian Democratic Union. Nearly half of Germans want the court to stop the bond-buying program, Handelsblatt reported today, citing a Forsa poll. The newspaper didn’t give any details of the poll sample.
“Everybody knows what uproar in the financial markets it would cause if the court rules the way it must,” said Murswiek. “But if democracy was to capitulate to the banks, it would be lost.”
In a preliminary order, the judges last year allowed Germany to ratify the 500 billion-euro ($664 billion) ESM bailout facility and the EU fiscal pact while ruling the measures must include provisions that the country won’t be forced to assume higher liabilities without its consent.
The constitutional court “does not have to judge on the utility or sense of the ECB measures or that of the rescue package the German parliament passed with a vast majority,” Chief Justice Andreas Vosskuhle said. “On the other hand, for judging the measures under the constitution, it doesn’t matter whether they have been successful in a broad sense.”
The September ESM ruling didn’t cover the bond program. In one paragraph of the written opinion dealing with securities issued by the ESM, the court mentioned rules for the ECB, saying the central bank may not buy bonds on the secondary market with the aim of financing euro member states independently of the capital markets.
“It seems the constitution may have to offer citizens some compensation for these losses, especially if it’s them who have to pay the bill,” said Vosskuhle. “One way of compensating would be to have a more generous reading of when they may sue against over-reaching acts.”
Attempting to ease German concerns that the ECB could end up transferring unlimited risks to taxpayers in the case of a euro-area default, Asmussen said the OMT program does have practical limits.
“The design of the OMT makes it obvious for all that the program is in practice limited, for example through the limitation to shorter maturities and the thereby limited pool of bonds that can be bought,” Asmussen said. Still, “we have announced that we are, ex ante, prepared to carry out OMTs without limitation.”
Weidmann said governments could find themselves paying for central bank policy if the ECB is itself threatened.
“A takeover of costs by the government could also be necessary, if the size of the losses calls the financial independence and therefore the credibility of the Eurosystem into question,” Weidmann said.
Associate judge Peter Huber, responsible for drafting the opinion for the panel of eight deciding the cases, asked whether there is a “rational way to determine the irrational factors” that the ECB aims to curb on the bond markets. “A year ago we were sitting here and were told, we need to clear the ESM to prevent forcing the ECB to take action.” Today “seemed like a deja vu.”
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