Crisis Course High Court Skeptical of ECB Bond Buys
Germany's high court on Tuesday made clear that it was skeptical of the ECB's program to buy unlimited quantities of sovereign bonds from struggling euro-zone member states. It could strike down the most successful tool in combating the crisis.
After an hour of intense questioning, a slight grin breaks out on Jörg Asmussen's face. The justices have been peppering him with questions and Asmussen, a member of the executive board of the European Central Bank, can no longer resist a brief smirk. "Mr. Asmussen, you can still smile," says Andreas Vosskuhle, president of Germany's Constitutional Court. "That comes as a great relief to us."
Tuesday was not an easy day for Asmussen, who was called to testify before Germany's highest court in defense of an ECB program which, while having proven to be economically successful, might be in violation of the law.
The case focuses on the ECB bond buying program known as Outright Monetary Transactions (OMT). The program, announced last autumn, envisions the ECB buying unlimited quantities of sovereign bonds from ailing euro-zone member states to hold down their borrowing costs. To date, the ECB has not made any bond purchases, but the mere announcement that it might has proven enough to calm the markets and provide European leaders with some to seek agreement on longer-term measures to solve the crisis.
Even opponents of the program have acknowledged its success. The OMT "has been the most successful measure taken in saving the euro thus far," says Dietrich Murswiek, who represents co-claimant Peter Gauweiler, a member of parliament with Bavaria's Christian Social Union.
But despite its success, the OMT program is illegal, say the plaintiffs. "State financing, whether direct or indirect, is not allowed for the ECB," says one of their attorneys, Karl Albrecht Schachtschneider. And his complaint is far from fanciful -- it is difficult not to see the OMT program as state financing. In essence, the court is being asked to decide whether economic pragmatism trumps a strict interpretation of the law.
Germany's Constitutional Court justices, of course, must follow the letter of the law. As proceedings began Tuesday morning, Court President Vosskuhle made it clear that the bench would be strictly considering questions of constitutionality, and that the possible successes achieved by the OMT would not play a role in the verdict. "Otherwise, the end would justify any means necessary," he said.
As such, the court's skepticism was difficult to ignore during testimony by Asmussen, who spent 75 minutes on the stand as an expert witness. He spoke of the irrationally high interest rates that countries like Spain and Italy were forced to pay on sovereign bond issues last summer. The ECB, he said, was forced to realize that monetary policy tools, such as adjusting the prime interest rate, were no longer enough. No matter how low the ECB set the rate, companies in Southern European countries were still forced to pay high rates. There was even a threat of deflation, Asmussen said. That alone was enough to justify the announcement of the OMT program.
This is essentially the core of the ECB's defense. As an element of monetary policy, the OMT bond purchases would be legal. They cannot, however, serve the purpose of providing euro-zone member states with liquidity.
The justices on Tuesday were full of questions. How is it possible to make an objective decision regarding the number of bonds that must be purchased to re-establish monetary policy functionality? What happens when the strict conditions demanded by the ECB of euro-zone member states are no longer met?
First and foremost, however, the justices wanted to know more about what might happen in the case of debt restructuring, a so-called "haircut." Should creditors, such as is expected in the case of Greece, be forced to write-off a portion of their sovereign bond holdings, would the ECB also be forced to forgive some of its debt holdings to the benefit of the state involved? "That would be a case of monetary state financing," said Justice Peter Müller on Tuesday. Asmussen was only able to provide a feeble contradiction.
Otherwise, Asmussen did his best to assuage the court's doubts. The unlimited bond-buying program, he said, was in fact limited. The ECB, he added, would only buy bonds with periods up to three years. It was important last year to send a "strong signal" to the markets to calm fears that the currency union was about to break apart. Asmussen also addressed concerns about the ECB's encroachment on democracy: "The ECB cannot, may not and is not interested in displacing the activities of democratically elected governments."
Asmussen was followed on the stand on Tuesday afternoon by Jens Weidmann, president of Germany's central bank, the Bundesbank. Asmussen studied together with Weidmann, but on Tuesday the two were opponents. Weidmann was the only member of the 23-member ECB Governing Council who voted against the OMT program last autumn.
During the five hours of hearings prior to taking the stand, Weidmann had been busily taking notes. Finally free to hold forth, he said he finds it problematic to communalize debt by way of the ECB balance sheet. Weidmann was also unconvinced by the calculations that Asmussen used to prove the irrationality of the high interest rates Southern European countries were forced to pay, calling them subjective. The follow-up questions posed from the bench seemed to indicate that the court agreed.
Overreaching Its Own Mandate
The hearings will continue on Wednesday and a decision is not expected for a few months. But already it has become clear just how difficult it will be for the court to reach a verdict. The justices clearly have grave doubts about the legality of the OMT program. But it also won't be easy for the court to determine exactly how to focus their decision. Their task, after all, is to ensure that Germany's constitution is respected. They only have a say about a European institution such as the ECB if they find implications for the German constitution, which are not immediately obvious in the present case.
Plaintiff attorney Murswiek has said it will be the "most important verdict in decades and for decades," but experts are skeptical. "The court is wrestling with itself," says Daniel Thym, a professor of law at the University of Constance. He says that the court is at risk of doing exactly what critics have accused the ECB of doing: overreaching its own mandate.
German Finance Minister Wolfgang Schäuble, who also took the stand, agrees. He said he "simply can't imagine that a German court can pass judgement over measures taken by the ECB."