ast updated: October 14, 2014 12:23 pm
ECB defends bond-buying plan at top EU court
The European Central Bank on Tuesday delivered a vigorous defence of its signature bond-buying programme credited with ending the eurozone crisis, telling the EU’s highest court that it was essential in preventing the break up of the common currency and therefore within its legal mandate.
Hans-Georg Kamman, the ECB’s lead lawyer, told the 15-judge European Court of Justice panel that the programme, known as Outright Monetary Transactions, was central to returning price stability to the eurozone – the primary policy goal of the ECB as defined in the EU’s treaties.
He reminded the judges of the atmosphere in mid-2012, when Greece was at risk of leaving the eurozone and Italian borrowing costs rose to near record levels, arguing that OMT was intended to lower “interest rate peaks” that were unjustified by economic fundamentals and instead tied to market panic that the euro was breaking apart.
“Numerous banks and companies started to prepare more or less openly for an end of the euro,” Mr Kamman told the court. “The situation was moving ever closer to crisis. The feared collapse risked becoming an uncontrollable self-fulfilling prophesy.”
Mr Kamman said the panic meant that the normal ECB policy measures – cutting interest rates – were not having any effect on borrowing costs in the most troubled eurozone countries, justifying a bond-buying programme as a monetary tool.
“The capital market was fragmented, cross-border interbank lending had virtually dried up,” Mr Kamman said. “Price stability in the euro area was seriously at risk.”
The events leading to case
Deliberations have begun on the legality of the bond-buying programme. Find out the key dates that got us to this point
The legal fight over OMT, brought by a group of German politicians and activists, has become one of the most closely watched legal cases in the EU’s history.
It not only threatens the programme that in effect ended the eurozone crisis but calls into question the ECB’s ability to purchase government bonds as one of its policy tools – something it is considering to fight the ongoing risk of deflation that is gripping the common currency.
The programme, which was unveiled after ECB chief Mario Draghi declared he would do “whatever it takes” to save the euro, stopped the sell-off of Italian and Spanish bonds – which had risen to levels where other eurozone countries had required bailouts – by signalling to the bond market that the ECB would use its printing press to stop panicked sell-offs of eurozone debt.
In depth
News, commentary and analysis of the eurozone’s debt crisis and its faltering recovery as it struggles with austerity and attempts to regain competitiveness
Further reading
Further reading
The case centres on whether it was violating the EU treaties ban on “monetary financing” – loaning ECB funds to eurozone governments – by authorising the purchase of bonds of struggling countries. The German constitutional court in February largely sided with the plaintiffs in the case, but referred the case to the ECJ as the authority over EU law – an unprecedented ceding of legal authority by the highly-influential court.
Lawyers for the lead plaintiff in the case, German lawmaker Peter Gauweiler, a member of the centre-right Christian Social Union party in the Bundestag, argued that the OMT programme was an “egregious extension of [ECB] powers”, allowing it to pursue an economic policy that went well beyond its monetary mandate.
“OMT-based purchases serve directly to lower the bond yields of certain states in difficulty . . . and avert the insolvency of member states,” said Mr Gauweiler’s lawyer, Dietrich Murswiek, arguing such a policy goal was “quite openly an economic objective.”
Mr Murswiek likened the ECB’s defence to a bank robber justifying his actions as charity because he intended to donate his proceeds to the needy. Just because the ECB claimed OMT had monetary goals did not mean it was really monetary policy, he argued.
Instead, Mr Murswiek said OMT would allow the ECB to shift debt owed to bondholders on to the shoulders of eurozone taxpayers.
“With OMT, the ECB will turn the monetary union into a debt union without consulting the member states,” he said.
Mr Kamman, the ECB lawyer, argued that just because monetary policy had a direct effect on government borrowing costs did not make it improper ECB intrusion into economic policy. He noted that at the outset of the eurozone crisis, steep cuts in key ECB interest rates led to concomitant drops in yields in sovereign bonds.
“Were these cuts in key interest rates economic policy measures or even unlawful financing of state budgets? Clearly not,” Mr Kamman argued.
The judges offered no hint of where they were leaning, listening stoically through both the ECB arguments and the presentations by five different groups of complainants, each of whom had a slightly different reason they felt OMT was illegal.
The German government lawyer remained largely neutral, arguing that while Berlin believed firmly in the ban on monetary financing, it believed the ECB had wide discretion to determine on its own what constituted monetary policy. He also argued that just because monetary policy occasionally bled into economic policy it was not necessarily illegal – as long as it was mostly focused on monetary matters.
“The ECB has a good deal of discretion in adopting monetary policy,” said the German government’s lawyer, Ulrich Häde. “It is part of the ECB’s intended role to decide on its own.”
Still, Mr Häde urged the ECJ to better define what kind of bond purchases were legal under EU treaties, something that could have a direct impact on future ECB quantitative easing policies.
As the European Court of Justice begins deliberations on the legality of the European Central Bank’s bond-buying programme, here are the key dates that got us to this point:
July 26 2012 – Mario Draghi, ECB president, makes his pronouncement to do “whatever it takes” to preserve the euro. His remarks have an instant, calming effect on debt-laden eurozone periphery countries, with Spanish and Italian government bond yields falling after his speech. It is not clear exactly what the pledge will involve.
September 6 – The ECB reveals its backstop plan for saving the euro: outright monetary transactions, or OMTs. If a eurozone government asks for help, the ECB will buy that government’s bonds in the market. “Whatever it takes” now has form and substance, but the German central bank is opposed to the measures.
September 12 – Germany’s constitutional court says it will review OMT as part of its investigation into the European Stability Mechanism.
April 25 2013 – “It is not the duty of the ECB to rescue states in crisis,” says the German central bank in a leaked submission to the German constitutional court. The document, submitted to the court in December, sets out the detail of the Bundesbank’s opposition to the OMT.
June 11 and 12 – The German constitutional court holds hearings on OMT, days after Mr Draghi confidently declared in a speech that “OMT has been probably the most successful monetary policy measure undertaken in recent times”.
November 21 – Still no decision from Germany’s highest court, which announces that no ruling will be made in 2013. At the time, Germany was without a government as parties were embroiled in coalition negotiations after general elections in September.
February 7 2014 – Finally, a decision. Of sorts. OMT is illegal, says the German constitutional court, but refers it up to the European Court of Justice. By passing the case up to the ECJ, the German court acknowledged the ECJ’s supremacy over EU institutions. After the ECJ rules, the matter is due to return to the German court, which could block Germany’s participation in OMT.
October 14 – The question of whether the ECB is allowed to do “whatever it takes” to save the euro finally reaches the ECJ. Cases referred by governments take, on average, 16 months before a preliminary ruling, so forget about a ruling this year.
Timeline compiled by Kadhim Schubber
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