The Bundesbank criticized the European Central Bank’s bond-buying plan in an opinion for Germany’s Constitutional Court, saying diverging interest rates within the euro region aren’t necessarily something the ECB should fix.
“Even though monetary policy is having different effects within the euro area, it is questionable whether these differences constitute a malfunctioning to be addressed by monetary policy,” the Bundesbank wrote in an opinion for the court dated Dec. 21 and published by the Handelsblatt newspaper today. The Bundesbank confirmed the authenticity of the document. Rising sovereign bond yields “cannot be used definitively as an explanation for a disturbance of monetary-policy transmission,” the Bundesbank opinion says.
Germany’s top court has scheduled hearings for June 11 and 12 to look into cases challenging the nation’s participation in the European Stability Mechanism and ECB policies. The Frankfurt-based ECB last year announced unlimited bond purchases for countries that request a bailout and commit to an overhaul of their economies. The program, known as Outright Monetary Transactions, is yet to be used. Bundesbank President Jens Weidmann was the only ECB policy maker to vote against the measure.
ECB President Mario Draghi has justified OMT by saying it addresses unwarranted fears of a euro breakup that are hampering transmission of monetary policy in some nations. The policy has helped to reduce borrowing costs for governments in crisis-hit countries such as Italy and Spain, where bond yields surged last year in response to widening budget deficits.
“It’s not possible to say whether a ‘distortion’ in yield developments for sovereign bonds is due to fundamentally justified causes or whether there are potential exaggerations, irrationalities or other forms of inefficiencies,” the Bundesbank says in the document.
“Higher refinancing costs for the private sector could also reflect higher national fiscal risks,” it wrote. “That wouldn’t be a development for monetary policy to address, but rather a direct consequence of national fiscal policy.”
The Bundesbank said ECB bond purchases under OMT would be different from those of other central banks because they target assets of poor credit quality, thereby increasing risks on the ECB’s balance sheet.
It also questioned whether the ECB will be able to ensure that countries applying for bond-market intervention abide by the conditions it sets.