ECB Bond Program Dubbed `Financial Dictatorship' in German Court

Is Draghi Raising Expectations Bad For the Market?
  • Germany's top tribunal re-hears lawsuits against OMT program
  • Plaintiffs argue ECB oversteps power limits in EU treaties

The European Central Bank was likened to a dictatorship as Germany’s top court began re-examining whether a bond-buying program underpinning Mario Draghi’s 2012 pledge to do “whatever it takes” to save the euro complies with the nation’s constitution.

Just eight months after the European Union’s highest tribunal backed ECB President Draghi’s proposals, Germany’s Federal Constitutional Court is revisiting the nation’s role in the Outright Monetary Transactions mechanism, or OMT.

Critics, including lawmakers and political activists, are trying to convince the German judges to issue a ruling limiting the role of Germany’s central bank in the program.

"The ECB is like a financial dictator," said Markus Kerber, a lawyer teaching finance in Berlin who is a plaintiff in the case. The Bundesbank, Germany’s central bank, “is obliged to oppose the program."

The court in Karlsruhe is reviewing lawsuits filed in 2012 that attack the OMT and are part of a long-running national dispute over the program, which has never been implemented. In early 2014, the judges sent the case to the EU’s highest tribunal with a list of demands to curb the program.

Soaring Yields

OMT was devised in August 2012 in response to soaring sovereign yields in a number of euro-area states, and was intended to persuade investors that the ECB wouldn’t let the euro break up. It foresaw outright bond purchases as long as the country in question was in a macroeconomic adjustment program run by the region’s bailout fund.

By contrast, quantitative easing, the sovereign bond-buying program the ECB announced in January 2015 to counter the risk of deflation across the euro area, is designed to boost inflation by depressing borrowing costs, and entails purchases of assets in every member state roughly according to the size of their economy.

In his statement to the court, Bundesbank President Jens Weidmann reaffirmed his reservations about OMT while clearly distinguishing it from QE.

“I am critical of the purchase of government bonds but I see quantitative easing as less problematic than OMT,” Weidmann said on Tuesday. “As long as QE is active, it seems unlikely that OMT will be activated.”

Fewer Strings

In June, the European Court of Justice backed the OMT with much fewer strings attached than demanded by the German court, which will now look at the guidelines and test them under the constitution.

The program was “developed in January 2012, to confront an extraordinary crisis situation,” ECB Executive Board member Yves Mersch said Tuesday. It doesn’t “go beyond what is required in order to achieve” its objectives of ensuring that the ECB’s monetary policy is effectively transmitted across the euro area.

The central issues will be whether the Bundesbank could participate in the OMT and whether the German government or parliament must take action against it, Andreas Vosskuhle, the court’s president, said in his opening remarks.

‘Charismatic’

"There’s the big, charismatic ‘whatever it takes’,” from Draghi “and then there are the technical features with its conditions," Vosskuhle said later in the hearing. The EU court “has said it is scrutinizing whether these conditions aren’t transgressed and that may be the limiting interpretation we have suggested."

The Bundesbank represents Germany in the European Central Bank system, which would have to implement measures under the OMT. While national tribunals are expected to follow the guidance of the EU’s Court of Justice, the German panel has expressed independence in the past.

Plaintiffs are now encouraging the constitutional court to continue that path and deviate from the guidelines it received from the European judges in June. They claim the ECB is acting outside the limits of the EU’s treaties and thus without democratic legitimacy.

‘Inventor, Enforcer’

"The EU is imperiled," Gregor Gysi, a member of opposition party Die Linke, one of the plaintiffs, told the court. "The ECB is claiming powers that were never transferred to it. We didn’t grant the ECB the power to be inventor, enforcer and controller of the OMT."

Germany’s parliament will have a say on whether OMT can be implemented as it must agree to any bailout program, said German Deputy Finance Minister Jens Spahn, who defended the government at the hearing.

Finance Minister Wolfgang Schaeuble “has said in this court and elsewhere that the ECB can only implement the OMT if parliament and the German government agree," said Spahn. "The situation is now much calmer than in 2013, which makes it even more unlikely we will see the OMT put into action."

Sibylle Kessal-Wulf, one of the eight judges, asked the plaintiffs whether the case may be moot because the ECB has now moved on to QE, which has a different scope.

"You may pretty well ask whether we are eight coroners looking at a dead body here," she said.

‘Danger’

Dietrich Murswiek, a lawyer for one of the plaintiffs, said this wouldn’t prevent a ruling in his favor since there was "danger of repetition" by the ECB. Murswiek is also the lawyer in one of four new cases targeting the QE program.

The ECB faces its next policy decision on March 10 and Draghi pledged on Monday to take measures to ensure its monetary policy reaches the real economy if that appears threatened by financial-market turbulence.

The Frankfurt-based ECB’s policy strategy currently rests on the twin barrels of QE -- 60 billion euros ($67 billion) of public and private-sector asset purchases per month -- and a deposit rate of minus 0.3 percent. The ECB’s ultimate aim is to drive inflation from its current level of 0.4 percent back toward the goal of just under 2 percent.

A decision on OMT is expected in the coming months.

The cases are: BVerfG, 2 BvR 2728/13 et al.

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