KARLSRUHE, Germany: The European Central Bank and the Bundesbank locked horns Tuesday in Germany’s highest court over a controversial bond purchase scheme that is credited with pulling back the eurozone from the brink of collapse last year.
The Constitutional Court has been asked by critics of the ECB’s “Outright Monetary Transactions” to examine whether the scheme is in line with German law or whether it breaches the central bank’s mandate.
One of the most vocal critics of the scheme has been the head of the German central bank or Bundesbank, Jens Weidmann, who was one of the expert witnesses to take the stand on the first of two days of hearings.
Earlier, the ECB’s case for the OMT programme had been made by executive board member Joerg Asmussen.
A group of politicians, lawyers and citizens have lodged the complaint against the OMT, arguing that the ECB is creating risks for German taxpayers that their elected representatives cannot control.
Despite its vocal opposition to the scheme, the Bundesbank is not one of the plaintiffs.
The ECB’s Asmussen argued that the OMT — which has proven to be the most effective weapon against the crisis so far and effectively defused fears last year of an imminent break-up of the euro — is in line with its mandate to safeguard price stability.
“The announcement of OMT was and is the necessary and appropriate step to eliminate the disruption in the transmission of monetary policy caused by concerns that there would be an unwanted break-up of the euro,” he told the court.
“The risks of not acting would have been greater,” Asmussen said.
“I am firmly convinced that introducing the OMT programme was the right thing to do to ensure price stability in the euro area. After all, a currency can only be stable if its continued existence is not in doubt,” he continued.
He said the ECB and its decision-makers were conscious of the limits of its monetary policy mandate.
“It is not allowed to, is not able to and does not want to replace the actions of democratically elected governments,” Asmussen insisted.
“Quite the opposite. The OMT programme is therefore aimed at protecting the market mechanism so as to urge the member states to make the necessary reforms,” he argued.
German Finance Minister Wolfgang Schaeuble, who had taken the stand earlier, insisted that the German government, which faces reelection in September, believed the ECB was acting within its mandate.
It was “up to the ECB to decide, within its wide remit, which are the correct monetary policy measures to take,” the minister insisted.
Furthermore, no bond purchases had yet been made under the OMT scheme “and so it can only be judged when a corresponding decision has been made,” the finance minister argued.
By contrast, Bundesbank chief Weidmann felt that the OMT programme was “problematic” because it blurred the dividing line between monetary policy and fiscal policy.
And that, in turn, constituted a “not negligible risk for the credibility of a central bank and its ability to safeguard price stability,” Weidmann argued.
Ever since the ECB unveiled the OMT to buy up the sovereign debt of the euro area’s most debt-wracked members last August, fears of a break-up of the single currency have indeed receded.
Europe’s storm-battered financial markets have enjoyed a period of relative calm, without a single OMT ever being carried out.
Already last year, critics saw complaints against the eurozone’s EFSF and ESM bailout funds similarly thrown out by the Constitutional Court.
And the bank has laid down very strict conditions if a country wants to be eligible for support from the OMT scheme. Furthermore, the ECB has said it will decide on a case-by-case basis whether to grant a country access.
The Constitutional Court is not scheduled to deliver its judgement until after the September 22 general elections.
ECB executive board member Yves Mersch told the daily Boersen-Zeitung in an interview to published on Wednesday, that while he did not want to anticipate the court’s decision, he was confident it would approve the programme.