Tuesday, June 11, 2013
ECB Scheme Under Court Scrutiny
The promise by the European Central Bank to do "whatever it takes" to save the euro is again being challenged. Germany's constitutional court will hold two days of hearings, before spending several months considering if the ECB's bailout plan infringes upon Germany sovereignty and issues its ruling. The court cannot revoke the ECB bond-buying scheme but in considering whether it violates the German parliament's sovereign right to control the budget, it could challenge certain aspects of the program, such as its "unlimited" nature. In a previous case, the Constitutional Court decided that the eurozone's bailout system was legal, but said the German lower house of parliament should be consulted fully on future bailouts.
The ECB's vow to buy up the bonds of eurozone countries if they come under severe pressure has been credited with arresting the eurozone crisis. There are fears that a court ruling against it could reignite market panic. The head of Germany's own central bank is expected to tell the court that the policy breaches Germany's constitution. Bundesbank President Jens Weidmann believes it is illegal because there is no limit to Germany's spending liability under the scheme, and that it is effectively a back-door way of providing loans to other countries' governments. At the outset of the hearing court President Andreas Vosskuhle said the success of the bond program would play "no role" in the assessment of its constitutionality.
The court will also hear from supporters of the scheme, such as the German ECB board member Joerg Asmussen. He told Germany's top-selling Bild newspaper recently that a court order to withdraw the program would have "significant consequences", and that it is the only thing that has restored confidence in the euro. ECB President Mario Draghi was herald as a hero when he unveiled the program last year when fears of a catastrophic euro breakup flared. Draghi has called the Outright Monetary Transactions (OMT) scheme "probably the most successful monetary policy measure undertaken in recent time". After announcing the scheme last year, fear abated and confidence has returned, so far the ECB has not needed to put its plan into action.
The interest rates on government debt has fallen back from the unsustainable levels that forced several governments to take bailouts. Before OMT was announced even Italy that carries a huge amount of debt was threatened with "bailout talk". The ECB says any country that needed OMT intervention would only get help if it first signed up to a bailout from other EU countries and then lived by the conditions of that bailout. A negitive court ruling could hamper the effectiveness of the OMT, which has giving investors the confidence to buy bonds issued by troubled countries such as Spain and Italy, it has insured these investors that the ECB would intervene on the secondary market if any government were at serious risk of defaulting on its debt.
Footnote; This post is related to another I recently wrote about the fact that a EU Banking Union remains very elusive and a distant dream,