The European Central Bank’s Outright Monetary Transactions program is “perfectly legal,” and the German Constitutional Court should recognize that it is crucial for both Germany and Europe as a whole, former ECB President Jean-Claude Trichet said.
Germany’s top court is reviewing suits by political groups, professors and lawmakers who argue the ECB’s OMT program and the European Stability Mechanism violate European laws and the constitutional principle of democracy. A ruling is expected later this year.
“What has been done by the ECB is legal, perfectly legal,” Trichet said yesterday in an interview at the International Economic Forum of the Americas in Montreal. “It could also be demonstrated to the Constitutional Court that it was certainly an important element for the sake of Europe as a whole, and in particular for the sake of Germany. So I don’t think that there is really a case to consider that the ECB Governing Council didn’t do what it had to do.”
The as-yet-unused OMT foresees potentially unlimited purchases of bonds of debt-stricken countries that sign up to adjustment programs. Conceived as yields on Spanish and Italian 10-year bonds exceeded 7 percent, OMT has helped the cost of borrowing for nations like Spain and Italy fall to levels not seen in more than two years.
The judges last year in a preliminary order allowed Germany to ratify the 500 billion-euro ($667 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.
OMT’s creation provided investors with “an element of additional confidence, alleviating considerably the tail risk of the explosion of the euro area,” Trichet said.
What’s more, he said, “all European democracies have confirmed individually and collectively that they wanted to preserve the European Union and were not accepting the dismantling of the euro area.”
Improving public finances have contributed to better investor sentiment, Trichet said. Governments in countries “that have been under stress” have reined in spending and cut current account deficits.
Still, the former central banker said, “this is no time for complacency. We must encourage all the European countries to go further in the direction of a more achieved economic and fiscal federation.”
Necessary reforms include allowing “more flexibility” in services and labor markets, Trichet said. A single European market for services “is very far from being achieved,” he said.
In Trichet’s view, government spending in some European countries should be “optimized,” which he said meant “a diminishing of public spending as a proportion of GDP through improvements in effectiveness and efficiency.” He didn’t elaborate, or name the countries he was referring to.
With Europe in recession, Trichet said the central bank has done all it could to foster growth. ECB policy makers left the benchmark interest rate at a record low 0.5 percent last week.
“At the present moment the ECB has concentrated in the crisis on ensuring all banks in Europe would have access to liquidity without any problems,” Trichet said. “The central bank has also demonstrated it could intervene on the secondary market of treasuries, which is also something which has been very important.”
GDP in the euro zone fell 0.2 percent in the first quarter, a sixth consecutive contraction. The euro-zone economy is forecast to stagnate in the second quarter before gross domestic product returns to growth, according to a Bloomberg survey of economists published May 9.
“It’s clear that a lot depends now not necessarily on the central bank, but on the various countries concerned to embark resolutely on the structural reforms,” Trichet said. Governments in the most indebted countries must “embark resolutely on re-establishing confidence for those that had lost an appropriate level of confidence,” he said.