The Bundesbank’s 29 page report to the court said the ECB’s line of argument was based on “strongly subjective elements” and warned that buying government debt could compromise the independence of the ECB.
22nd October 2013
While the world continues to debate upon “policy paralysis” in Washington, the rise of Euro and a host of other currencies against the U.S. dollar and possibility of the Fed ending its Q.E-3, investors and strategists have forgotten a threat in Europe. Germany’s constitutional court could rule against the European Central Bank’s (ECB) bond buying program- The Outright Monetary Transactions, (OMT) and the initiatives of Mario Draghi of making “all possible efforts” to save the Euro. Experts say that a reversal by the German court is unlikely, but cannot be ruled out either, if the German court does reverse the bond-buying program- it could be disastrous to the global economy- causing a havoc of sorts- starting with the free fall of the common currency, rise in European bond yields and resulting in another crisis.
Vincent Cignarella, a currency strategist and coloumnist at the Wall Street Journal said “Although, the ECB is yet to make use of the OMT, authorizing it to make purchases in the secondary market of bonds issued by the member countries, which in turn has increased investor confidence in the Euro zone – a German court decision, that could halt the program could erase that confidence in a heartbeat” he said.
However, the German court does not have legal authority over the ECB and cannot restrict its actions, but it does have powers to overturn a decision made in the German parliament and can limit the participation of the government in either the OMT or the European Stability Mechanism and the European Financial Stabilisation Mechanism (Germany is responsible for contributing about Euro 190 billion by next April; this contribution is the maximum amount currently authorized by the German parliament).
Cignarella says, the decision of the court would hinge on whether the OMT will constrain the German tax payer- beyond the limit authorised by the German parliament. If so, the court could rule the OMT as illegal and forbid the Bundesbank Bank, Germany’s Central Bank from participating in the OMT. Another scenario, outlined by Cignarella is transferring the case to European Court of Justice, based in Luxembourg – in this scenario the European court might rule in favour of ECB. Passing the decision to another court would also give enough time for German Chancellor Angela Merkel to muster support in the parliament to increase the authorization, when it would be needed.
Germans Voice Anger against OMT
According to a survey published by German business paper Handelsblatt in June, half of all Germans want the constitutional court to end the ECB’s OMT, with only 31 percent believing that complaints against the policy are unfounded. The OMT’s loudest critic has been Germany’s Central Bank, whose chief Jans Weidmann has objected to the ECB’s initiative. The Bundesbank’s 29 page report to the court said the ECB’s line of argument was based on “strongly subjective elements” and warned that buying government debt could compromise the independence of the ECB. The case against OMT was lodged by more than 37,000 plaintiffs’ including a number of German lawyers, citizens and the Bundesbank – which said the ECB was overstepping its mandate. The ECB contesting the case has argued in its 52 page statement to the court that – the OMT is legal, within its mandate of securing price stability and strengthens trust in the Euro.
Former Advisor to the German Chancellor, Weidmann will represent the case for Bundesbank at the hearing and his compatriot Joerg Asmussen will put the case of the ECB. Germany’s Finance Minister Wolfgang Schaeuble will represent the Government in the constitutional court.