ECB again defends bond-buying programme in Germany’s top court

Mario Draghi

Der EZB-Chef Mario Draghi sieht [European Parliament]

The European Central Bank defended its never-used scheme to potentially buy unlimited amounts of government debt in Germany’s highest court on Tuesday (16 February), insisting that such a programme did not overstep its mandate.

The ECB “did not exceed its monetary policy mandate” when it unveiled the OMT – or Outright Monetary Transactions – in 2012, executive board member Yves Mersch told the country’s Constitutional Court in Karlsruhe.

The court was hearing arguments for and against the OMT programme, which the ECB had launched at the height of the eurozone sovereign debt crisis as a weapon to warn off investors from speculating on government bonds.

The programme was never implemented, and has since been superceded by a far bigger bond purchasing programme known as QE.

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But some 37,000 eurosceptics took their case against the OMT to Germany’s highest court, arguing that such measures are effectively a way of printing money to pay off a government’s debt and overstepped the ECB’s mandate.

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In a preliminary ruling back in 2014, the constitutional court then partially agreed with their concerns, ruling that there are “important reasons to suggest that it goes beyond the ECB’s monetary policy mandate and infringes on the powers of the member states and contravenes the ban on monetary deficit financing”.

But it passed the case on to the European Court of Justice in Luxembourg before issuing its final ruling.

The ECJ swept aside the German court’s misgivings last June, saying the scheme was compatible with EU law.

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The court in Karlsruhe therefore now has to issue its final decision on the case, with a verdict not expected before a few months.

Mersch argued that the OMTs were developed “to confront an extraordinary crisis situation.”

The crisis situation “was characterised by massive distortions of the government bond market that developed their own momentum. This in turn led to a disruption of the monetary policy transmission mechanism, which posed a threat for price stability,” he said.

But he noted that while OMTs “are in principle available as monetary policy instruments. The conditions for their crisis and location-related activation are, however, not currently met.”

Debt-wary Germany is especially sceptical about such bond-purchasing programmes, and the head of the country’s central bank Jens Weidmann had voted against both OMT and the later QE programme.

The European Central Bank agreed on 6 September, 2012 to launch a potentially unlimited bond-buying programme to lower struggling eurozone countries' borrowing costs and draw a line under the debt crisis.

ECB President Mario Draghi said the new plan, aimed at the secondary market, would address bond market distortions and "unfounded" fears of investors about the survival of the euro.

The OMT (Outright Monetary Transactions) programme was launched at the height of the eurozone debt crisis, shortly after Draghi said in a speech that the ECB would do “whatever it takes” to prevent the collapse of the currency union.

It allows the ECB to buy bonds of a eurozone country on the open market if its government has agreed to a reform programme in return for eurozone funding.

The German Central Bank (Bundesbank) is opposed to bond-buying, saying it is akin to bailing out states.

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