A key European Central Bank programme that has been credited with calming the three-year euro crisis faces a legal challenge on Tuesday in Germany’s highest court.
The Federal Constitutional Court in Karlsruhe is considering arguments against the ECB’s offer to buy government bonds and lower borrowing costs for indebted countries.
Opponents of the bond-buying programme say this oversteps the ECB’s mandate which forbid it from financing governments.
The arguments against the programme, known as Outright Monetary Transactions, have been added to another challenge against Germany’s ratification of the euro region’s emergency bailout fund. The current challenges cite both EU laws and the German constitution’s provision that only the elected national parliament can decide how taxpayer money is spent.
European Union efforts to rescue financial troubled countries have run into popular opposition in Germany, the biggest financial backer of any bailout or financial backstop due to its status as the biggest eurozone economy.
Any ruling against the OMT would likely effectively torpedo the OMT. Analysts say that an outright rejection is highly unlikely but markets are watching to see if the judges attach any conditions that might raise doubts about its effectiveness. It’s also possible that some issues could be referred to the EU’s own court. Karlsruhe judges will hear oral arguments on Tuesday and Wednesday; a decision might not come for several months.
The OMT program was created after ECB head Mario Draghi dramatically vowed last July 26 to “do whatever it takes” to save the euro. The ECB hasn’t bought any bonds. But the program’s mere existence has helped lower countries’ borrowing costs and eased fears the 17-country euro union might break apart. To take part the scheme, a country would have to commit to reduce its debts and deficits, as well as accept a bailout loan or credit line from the European Union’s financial rescue fund, the European Stability Mechanism.
By buying up the country’s bonds, the ECB programme would help drive up a bond’s price at the same time as lowing the interest rate charged on them. This process would mean lower interest costs for governments the next time they borrow money by selling new bonds.
A key aspect behind the programme’s success so far is the ECB’s statement that there wouldn’t be any limit on how many bonds it could buy. That has kept markets wary of going against the central bank and its financial firepower.
The ECB is sending Joerg Asmussen, a former German finance ministry official who has since been appointed to the ECB’s six-member executive board, to defend the programme.
Also testifying is OMT critic Jens Weidmann, the head of Germany’s Bundesbank national central bank. Weidmann, who sits on the 23-member ECB rate-setting council by virtue of his job as Bundesbank head, was the only member to vote against setting up the OMT program on Sept. 6 last year.
Michael Wohlgemuth, an economist with the Open Europe Berlin think tank, said Asmussen would face a balancing act, needing to both argue that the programme remained within legal limits while taking care not to give the impression such limits would undermine its potential effectiveness.
“That is the trade-off that has to be made somehow appease the constitutional court without getting financial markets in a panic,” said Wohlgemuth.