European Central Bank President Mario Draghi helped save the euro with his pledge to do “whatever it takes” as lenders prepared for a collapse of the currency, an ECB lawyer told a hearing today.
The European Court of Justice, the bloc’s highest court, is weighing whether Draghi’s ECB overstepped its powers in 2012 with the promise to buy the debt of stressed countries if needed. The EU tribunal’s 15-judge panel is examining the Outright Monetary Transactions program after Germany’s own top court earlier this year expressed doubts about its legality.
“The numerous cuts to key ECB interest rates made between late 2011 and July 2012 were having almost no effect on certain markets in the euro area,” Hans-Georg Kamann, a lawyer for the ECB told the EU court. “Price stability in the euro area was seriously at risk” due to “increasing fears among many market participants that the euro could collapse.”
The Frankfurt-based ECB announced the details of its unprecedented bond-purchase plan in September 2012 as bets multiplied that the euro area would break apart and after Draghi’s promise to do whatever was needed to save the currency. The calming of financial markets that the still-untapped OMT program produced helped the euro area emerge from its longest-ever recession in the first half of last year.
The ECB “is acting like a central committee,” German politician Peter Gauweiler said outside the hearing room. “The central committee has moved from Moscow to Frankfurt. It thinks it can rule over citizens’ money at will.”
Gauweiler, a lawmaker from German Chancellor Angela Merkel’s CSU Bavarian sister party and one of the main claimants in a series of German cases, got a speedy rebuke from Wolfgang Schaeuble, his country’s finance minister.
“Someone who speaks like that hasn’t understood the importance of the central bank’s independence,” Schaeuble said at a ministerial meeting also in Luxembourg. It “isn’t ok” to degrade the ECB in speeches and Gauweiler’s comparison is “regrettable,” he said.
Bond purchases through the OMT mechanism “serve directly to lower the bond yields of certain states in difficulty” and to allay market fears, so “the immediate goal of the OMT is quite openly an economic objective,” said Dietrich Murswiek, Gauweiler’s lawyer.
The OMT decision “shows that the ECB is very aware of the limits to its mandate and takes these limits seriously,” said Kamann. “OMTs are able to be activated” only “in a crisis situation in which you have a lot of economic participants panicking and distorting market prices, thereby making monetary policy practically impossible.”
While the OMT program averted fears of a breakup of the currency region, it did little to help the euro area out of its malaise. Two years after its announcement, the ECB is gearing up to buy asset-backed securities and covered bonds to funnel credit to companies and households and fuel inflation in the now 18-nation currency bloc that’s running at a fraction of its target of just below 2 percent.
Draghi has held out the prospect of stepping up stimulus to include sovereign-bond purchases, even though the current plan already sparked an outcry among academics and representatives of all major political parties in Germany and drew opposition from Bundesbank President Jens Weidmann and two other ECB council members.
A rising number of economists in Bloomberg’s monthly survey predict the ECB will embark on the type of quantitative easing other central banks have enacted as the economic outlook deteriorates.
While the EU court is unlikely to overturn the bank’s decision, the ECB will likely face a number of conditions, said legal scholars.
“There is no real suspense about the way the ruling will go, but there will be suspense about the actual content of the decision,” said Pierre-Henri Conac, a professor of financial-markets law at the University of Luxembourg. “The decision will most likely validate the OMT and at the same time take into account as much as possible” the compromise proposed.
The German court said in its February judgment that the OMT may violate EU rules because it amounts to economic policy that is outside the ECB’s mandate. Judges there said the plan may also be seen as monetary financing of governments, which the EU treaties ban.
The OMT program could pass the test if it were limited and placed under certain conditions, like banning debt cuts and unlimited purchases of bonds of selected member states, the German court said.
The EU court usually takes about 16 months to rule on cases once they have been referred by national judges.
Advocate General Pedro Cruz Villalon said he expects to publish his non-binding opinion on the case on Jan. 14. The court in general rules about four to six months later.
The German top court in 2011 threw out cases against the bailout packages for Greece and the country’s participation in the European Financial Stability Facility, the predecessor of the ESM.
The EU court case is: C-62/14, Peter Gauweiler and Others.