June 11, 2013
|The German Constitutional Court in Karlsruhe|
The German Constitutional Court’s (GCC) hearings into the legality of the ECB’s actions to combat the eurozone crisis – and specifically the OMT bond buying programme – kicked off this morning. (See here for the background). In a front page leader, FAZ describes the case as one of the “most important” in the court’s history.
Public opinion in Germany is mixed, with a Forsa poll for Handelsblatt finding that 48% of Germans hope that the Court will put a stop to the OMT, while 31% believe that the complaint against the ECB is unjustified. As we noted in our flash anaylsis on the topic yesterday, the GCC can’t actually stop the ECB. At worst, it could remove Germany from the ECB’s bond buying programme and probably, therefore, from the eurozone itself. (A poorly phrased poll question, then, but a very telling result nonetheless).
With Schäuble, the German Finance Minister, and the ECB’s positions already well known (that OMT is within the Central bank’s mandate), we can safely say that the highlight of the day will come from the opposing side, in testimony of Bundesbank President Jens Weidmann. In terms of their specific grievances, it will be the first time we will hear a detailed, public explanation of where the Bundesbank stands on this issue, while the tone of Weidmann’s comments will also be interesting. Will there be any more Faust references we wonder?
Check our twitter feed for live updates from Karlsruhe throughout the day. We will also continue to update this blog as things develop.
Bundesbank President Jens Weidmann has now had his say – and again his points were very much as expected (his full statement is here but only in German for now).
- Warned that ECB OMT blurs the line between monetary and fiscal policy – this makes it more difficult to achieve price stability and spreads solvency risks amongst eurozone countries, but does so without any parliamentary or democratic approval.
- Pushed for a narrow interpretation of a central bank’s primary mandate, with a complete focus on price stability.
- Suggested that the OMT does represent potential losses for taxpayers, arguing that if the ECB took on significant amounts of risky debt, it may face large a loss which it cannot absorb and may require aid from member states.
- Argued that even secondary market purchases can overturn the force of market discipline and undermine fiscal autonomy.
- Issued a warning over the interpretation of the real-risk premiums for bonds, which he suggested was very subjective and dependent on future policies.
- Accepted that the inflation outlook in the eurozone fits with price stability at the moment, but still expressed serious concern about comprising the ECB’s focus on this.
It seems to us that, of the two sides, Weidmann had the tougher case to make. Ultimately, as much of the above shows, he is forced to consider hypothetical scenarios and potential worst cases. These are undoubtedly risks that should be highlighted, but it does leave one feeling that his argument is slightly less clear cut than Asmussen’s.
Having heard the key testimony of both sides, we still expect the court to side with the ECB, but with some caveats (although how strict they will be is very much up in the air). Of course, this could still develop more tomorrow.
Asmussen has now concluded his testimony and subsequent Q&A, and the ECB has also helpfully put a transcript on their website. Here are the key points he made:
- the OMT will have the ability to sell bonds as well as buy them, and it will not take them off the market permanently, unlike its forerunner the SMP (in fact Asmussen repeatedly highlighted the differences between the two);
- the OMT is pari passu (equal to) other creditors,
- the OMT seeks only to reduce unwarranted interest rate spikes and is not aimed at harmonising financing conditions of member states,
- the ECB would react if a country were to try to game the system by converting all its bond issues to a short maturity (of up to three years), but that in any case markets themselves would “see through and deny” such attempts,
- the only risks associated with the programme stem from countries operating “un-sound” policies, but that those states that fail to comply with the OMT’s conditionality could be faced with the prospect of having to leave the eurozone.
The comments were more or less as expected. However, there are a couple of interesting points. First, the fact that the bonds purchased under the OMT will be judged at market value suggests that, if they are purchased and then decline in value, the ECB could be facing losses on its balance sheet. A tricky technical and political issue. Second, the point about ‘un-sound’ policies leaves us feeling slightly uneasy. Its clear that even with an ESM bailout programme, implementation may not be up-to-scratch. Meanwhile, it also highlights the clear link that would be established between ECB policies and the fiscal (and other) policy of national governments. This surely raises questions about the ECB’s independence.
Asmussen also admitted that the policy did have de-facto practical limits given that it will only purchase short term debt, as reported over the weekend.
Handeslblatt reports that Philip Rösler, the German Minister for Trade and Vice Chancellor is coming under increasing pressure from his own FDP party to take a stand against the ECB, following the Handelsblatt/Forsa poll showing that almost 50% of Germans hope that Karlsruhe will stop the ECB’s OMT programme (despite this actual course of action not being possible, see blog intro above on this).
Frank Schäffler, the financial expert of the FDP parliamentary group, told Handelsblatt Online that “Working towards a market-economy is widespread among the followers of the FDP. Liberals know thatprosperity cannot be printed from the ECB.”
The irony of clinging on to central bank independence, while using political pressure to change the course of the ECB is not lost on us – nor on Rösler it seems, who said: “We must not allow this course toward stability to be broken up through the the attempt to exert influence on the European Central Bank.”
These comments from ECB Executive Board member Yves Mersch seem to confirm our feelings that the ECB is trying to have it both ways over its refusal to publish the OMT documentation (see 13:30):
Mersch: “controlled uncertainty on the OMT is necessary”
— zerohedge (@zerohedge) June 11, 2013
Germany’s new anti-euro party Alternative für Deutschland has just put out a press release citing Professor Joachim Starbatty – one of the original plaintiffs in the case and now one of AfD’s top candidates in September’s elections – warning that under the OMT, German taxpayers will be responsible for liabilities that are “no longer the responsibility of any government or parliament”. The party is clearly hoping the publicity around the hearings will boost its poll ratings.
Asmussen is clearly channelling Draghi in his comments below. The ECB’s continuing refusal to simply publish the legal documents relating to the OMT is at best strange and at worst downright obstructive. It does beg the question: what are they trying to hide? Maybe nothing, but at the very least it seems they are trying to have the best of both worlds. By refusing to reveal the exact terms and conditions, the ECB can try to address German concerns over the extent of the OMT (as we have seen them doing in the run up to this case) while also being able to continuously reassure markets that the scheme is in fact “unlimited”.
Such a balancing act is tough to pull off and may add to confusion if it breaks down. Some transparency would be welcomed. It needs to happen at some point, who’s to say it would be better revealing the legal documentation just when the OMT is being tapped, surely by definition that would be a period of crisis?
The ECB’s Jörg Asmussen is up now making the point that the ECB would actually adopt a legal ordinance before any bonds were purchased:
German Finance Minister Wolfgang Schäuble has spoken, and as expected, he backed the ECB:
Author : Open Europe blog team