Business World

Tuesday 21 November 2017

German judges probe ECB plan to buy bonds off crisis-hit states

Karin Matussek and Jeff Black

GERMANY's top judges examining the European Central Bank's plan to buy bonds of crisis-torn countries asked whether the operation crosses the line from legitimate monetary policy to illicit state financing.

Witnesses at the second day of hearings before the Federal Constitutional Court in Karlsruhe faced queries from the panel on whether the central bank's Outright Monetary Transactions (OMT) oversteps the mark beyond the ECB's mandate to conduct monetary policy.

"We have heard that it's very difficult to demarcate the line between state financing and monetary policy" when analysing the OMT, chief justice Andreas Vosskuhle said. The question for the experts is whether "the OMT's caveats could be a good middle course".

ECB Executive Board member Joerg Asmussen on Monday told the court the central bank's OMT plan has safeguards that prevent it from turning into a government financing programme, including a waiting period before a security can be bought on the secondary market.

European Union rules ban government financing by the ECB. 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.

Germany's top court is reviewing suits by political groups, professors and lawmakers who argue the ECB's OMT programme and the European Stability Mechanism (ESM) violate European laws and democracy.

On Tuesday, German Finance Minister Wolfgang Schauble backed the OMT plan, saying his government had seen no evidence that the bank had exceeded its mandate in its actions to date. The minister was again at the hearings on Wednesday.

Clemens Fuest, president of the ZEW Center for European Economic Research in Mannheim, Germany, told the court that every purchase of government bonds has the effect that it becomes easier for the country to refinance itself.

"It's a grey area," said Fuest. "But I think the main effect of the ECB's policies is to ease access of these countries to the financial markets. That doesn't mean, however, that the bank didn't have any monetary considerations" for the OMT.

Fuest backed claims by the plaintiff that German lawmakers cannot control how big the liabilities will be under the rescue policies. While they have a say on the debt Germany assumes under the ESM, they cannot steer how much the OMT may cost in the end.

"As a lawmaker, I would have to ask how much taxpayer money I would put at risk when voting on an ESM rescue program," said Fuest.

"Well, I couldn't answer that question."

A final ruling is expected later this year. (Bloomberg)

Irish Independent

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