A feud at the heart of European fiscal policy is due to be played out in Germany’s highest court on Tuesday, to determine whether the European Central Bank acted illegally when it vowed to save the euro last year.
The ECB floated an unlimited bond-buying programme as an emergency means of rescuing stricken eurozone countries last year. Known as Outright Monetary Transactions (OMT), it envisages buying the bonds of crisis-hit countries threatened by speculation that they might leave the eurozone. As such, the scheme has been described as a “fully effective backstop” for ailing eurozone members.
The policy was unveiled at the height of the eurozone crisis last September by ECB President Mario Draghi, who promised to do “whatever it takes” to save the single currency. OMT has yet to be tried. However, at the time, its mere mention was enough to quickly restore confidence in the euro and drive down the rocketing borrowing costs of Spain and Italy. Despite this, the proposals drew strong criticism from the German Bundesbank President and ECB board member, Jens Weidmann, who described the policy as “tantamount to funding governments by printing money”. He warned that the measures risked hyperinflation and questioned their legality under German law.
Mr Weidmann has taken his case further and will today argue before Germany’s Constitutional Court judges that the ECB has overstepped its mandate by pledging to finance the deficits of bankrupt eurozone countries. He will also underline the potential risks of OMT to German taxpayers – ultimately the “backstop” of such funding. He is being backed by 37,000 plaintiffs; like-minded German citizens including a Bavarian MP, members of the country’s Left Party, and a group of Eurosceptic professors.
The judges are not expected to make a final ruling in the case until later this year. Should they agree with the Bundesbank President, the ECB will come under pressure to abandon OMT. The court has no power to influence ECB policy directly but it can forbid the Bundesbank to participate in its programme, which would have grave implications for OMT’s future.
It is widely held that a verdict which came out against OMT would quickly re-ignite the eurozone crisis. It could also have serious political consequences for Germany’s Chancellor, Angela Merkel. She faces a general election in September and to date she has managed to keep potentially explosive subjects such as the eurozone crisis off her campaign agenda.
Mr Draghi will not be in court to defend OMT. Instead he will be represented by Jörg Asmussen, a leading member of the ECB’s executive board, who happens to be a close friend of Mr Weidmann. Mr Asmussen is faced with the task of explaining to the court and an increasingly Eurosceptic German public that OMT is well within the remit of the ECB.
In an indication of how seriously the ECB is taking today’s constitutional court hearing, Mr Asmussen took the unusual step of giving an interview to Germany’s mass circulation Bild newspaper to justify the bank’s policies. “When we announced the programme, the eurozone was nearing uncontrolled decomposition,” he told the newspaper. “At this time the ECB was the only European institution capable of taking action and it had to make clear to speculators, ‘Do not mess with the ECB’”.
Mr Asmussen has warned of serious consequences if the court rules against the ECB. Mr Draghi has also leapt to the defence of his policy. Last week he went so far as to describe OMT as “probably the most successful monetary policy measure undertaken in recent times”.