Blog Post

Overview of the Karlsruhe Hearing on OMT – Summary

It is noteworthy that the Court asked several times throughout the hearing about the possibility to change the ECB’s mandate – not least because the core of the debate appeared to be the compatibility of the OMT program with the ECB’s monetary policy mandate.

By: Date: June 13, 2013 Topic: European Macroeconomics & Governance

In the previous blog post we set the stage for the two-day long hearing on 11 and 12 June before the German Federal Constitutional Court in Karlsruhe and delineated the main issues. The first day was dominated by the exchange of opinions on whether or not the ECB’s OMT is compatible with its mandate of safeguarding price stability and with the German basic law. The Court’s President, Andreas Voßkuhle, stated clearly that the benchmark of the legality of OMT cannot be its alleged success to calm down financial markets. Ends could never justify means. The second day opened the debate to expert witnesses, most of them rather sceptical about the OMT program. It is noteworthy that the Court asked several times throughout the hearing about the possibility to change the ECB’s mandate – not least because the core of the debate appeared to be the compatibility of the OMT program with the ECB’s monetary policy mandate.

Tuesday’s hearing began with statements of the complainants. Most of the issues raised pointed to the fact that the ECB’s policy actions may have calmed down markets, but lacked some form of democratic legitimisation because the ECB is not mandated to undertake such policies in the first place. Others criticized that policymakers slowly and piecewise confer more power to the EU. In their view, the FCC should define clear boundaries and guidelines according to which a further conferral of power to the EU should be subject to a national referendum. Gregor Gysi of the left party Die Linke also called for a treaty change and claims that the fiscal compact is the “central element of authoritarian crisis policy in Europe which could ultimately trigger racial sentiments and right-wing extremism.”

Wolfgang Schäuble, Germany’s finance minister, argued that the strong independence of the ECB, which was agreed upon in the Maastricht Treaty 20 years ago – not least due to German insistence, justifies discretion in the ECB’s policy choices. This discretion has to be respected by courts. He also emphasized that the ECB’s policies are not subject to the Federal Constitutional Court (FCC)’s ruling and that OMT first and foremost is an announcement that would have to be operationalized through a legal act. On enquiry of the Court Jörg Asmussen of the ECB agreed that OMT would first have to be activated and that national parliaments would have to consent.

Asmussen speaking for the ECB argued in his statement (see full statement here) that “the announcement of OMTs was and is the necessary and appropriate step to eliminate the disruption in the transmission of monetary policy caused by concerns that there would be an unwanted break-up of the euro. The risks of not acting would have been greater.” He reaffirmed that while the OMT program in theory is unlimited, in practice it is capped because the pool of bonds that can be purchases, namely those with a maturity of three years maximum, is limited. In light of democratic participation, Asmussen pointed out that the OMT can only be enacted jointly with ESM and EFSF programs. Yet if a country does not fulfil the OMT program’s conditionalities it may face the prospect of a euro zone exit. He further confirmed that the ECB would buy government bonds of all countries disregarding their economic size if and only if the country would subject itself to an ESM program.

Jens Weidmann speaking for the Bundesbank began his arguments by stressing the disciplining forces of bond markets that could be threatened and undermined by the ECB’s OMT program (full statement in German here). Monetary and fiscal policies have to be separated clearly and institutionally – between the ECB and national governments. Ultimately, Weidmann said, monetary policy cannot be the remedy for the EU’s problems – this is the task of politics. If time has to be bought, this should be done with the help of ESM and EFSF, but to use Draghi’s OMT program for that end is an “illusion.” Finally, he also sided with other critics and argues that the OMT program is not subject to sufficient parliamentary oversight.

Wednesday’s hearing began with the statement of the expert witnesses. Clemens Fuest of ZEW argued that the ECB is acting on hazy grounds and blurring the boundaries of fiscal and monetary policy with its OMT program. The ECB’s bond purchasing program, in his view, lowers the financing costs of ailing governments which is part of the fiscal policy realm and not part of the ECB’s mandate. Fuest sheds doubt on the ECB’s reasoning that high risk premia are driven by irrational believes about a potential break-up of the euro zone. Higher risk premia could as well be attributed to expectations of a debt restructuring. Moreover, the alleged irreversibility of the euro zone is an illusion because sovereign nations can exit the euro zone if they want to. Ultimately the ECB has been pushed further into the fiscal policy realm by policymakers and is thereby exceeding its mandate increasingly.

Hans-Werner Sinn of the ifo-Institute argued that the OMT program essentially works as an insurance mechanism for governments. Yet if the ECB is offering this insurance free of charge as it is currently doing, it is de facto subsidizing national governments. He blamed politics for not having imposed tougher regulation on banks, in particular through Basel-II. This has, in his view, led banks to loosen their credit policies and, arguably, contributed to the outbreak of the financial crisis. He also challenged the view that the OMT program is de facto capped by suggesting that at some point in time all governments bonds that can be purchase by the ECB would have a maturity of less than three years. Accordingly, he estimated the total volume of OMT bond purchases to amount to 3 tn EUR. Overall he portrayed the ECB’s action as “regional fiscal policy” because these countries received central bank money for consumption and debt repayment.

Harald Uhlig of the University of Chicago claimed that the price the ECB is paying for the purchase of bonds on the secondary market is too high. To prevent this from happening further he suggested that the ECB should only be allowed to buy these bonds at the market price. Judging the market sentiment, Uhlig shared his view that the market no longer believes that the OMT program is truly unlimited. In the eyes of investors, the ECB could change “the rules of the game” at any time as they wish, he says.

Asmussen defended the policy stance of the ECB once again: in times of crisis and in a heterogeneous economic area, the standard tools of monetary policy such as changes in the interest rate would no longer suffice to guarantee price stability in the euro zone. He further emphasised that the ECB has and will not use the secondary market as a vehicle to circumvent the prohibition of government bond purchases in the primary market.

Dieter Murswiek, representative of Peter Gauweiler (CSU), argued that precisely because the ends do not justify the means the mandate of the ECB has to be construed narrowly. Bond purchases are then not in line with the constitution if they are not covered under the mandate. Invoking the legal “identity control”, he suggested that in that case Germany should never have given its consented to the Maastricht Treaty in the first place. The logical conclusion would be that the ECB’s statute should be re-negotiated. It is clearly noteworthy that President Voßkuhle and other judges had asked several times throughout the hearing about the possibility to change the ECB’s mandate – not least because the core of the debate appeared to be the compatibility of the OMT program with the ECB’s monetary policy mandate.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Upcoming Event

Jun
17
12:30

Role of national structural reforms in enhancing resilience in the Euro Area

At this event Gita Gopinath, Chief Economist at the IMF will discuss the role of national structural reforms in enhancing resilience in the Euro Area.

Speakers: Shekhar Aiyar, Maria Demertzis, Romain Duval, Gita Gopinath and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jun
19
12:30

What reforms for Europe's Monetary Union: a view from Spain

How is a successful European Monetary Union still possible in today's ever-shifting political landscape? What reforms need to occur in order to guarantee success of cohesive policies?

Speakers: Fernando Fernández, José Carlos García de Quevedo, Gabriele Giudice, Inês Goncalves Raposo, Javier Méndez Llera and Isabel Riaño Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read about event More on this topic

Upcoming Event

Jun
25
08:30

How comprehensive is the EU political realignment?

Has the left-right divide become obsolete in EU politics?

Speakers: David Amiel, Otilia Dhand, Nicolas Véron and Silke Wettach Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article Download PDF More on this topic

Policy Brief

A strategic agenda for the new EU leadership

Memo to the presidents of the European Commission, Council and Parliament. 'A strategic agenda for the new EU leadership' by Maria Demertzis, André Sapir and Guntram Wolff is the first of our 2019 Bruegel memos to the new presidents of the European Commission, Council and Parliament. Focusing on the most important economic questions at EU level, these Bruegel memos are intended to be a strategic to-do list, outlining the state of affairs that will greet the new Commission.

By: Maria Demertzis, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 13, 2019
Read about event More on this topic

Past Event

Past Event

Past, present, and future EU trade policy: a conversation with Commissioner Malmström

What was trade policy during the last European Commission? What will be the future of European trade under the next Commission?

Speakers: Cecilia Malmström, André Sapir and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: June 13, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director’s Cut: A strategic agenda for the incoming EU presidents

In this Director’s Cut of ‘The Sound of Economics’, Bruegel’s Guntram Wolff and Maria Demertzis talk through their memo to the new presidents of the European Commission, Council and Parliament, outlining the specific measures that should be implemented in order to tackle the most formidable challenges arising in the next five years.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 12, 2019
Read article Download PDF More on this topic

External Publication

Effectiveness of cohesion policy: learning from the project characteristics that produce the best results

This study by Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza, and Catarina Midões analyses the characteristics of cohesion policy projects that can contribute to successful outcomes. Their analysis is based on a literature survey, an econometric analysis and interviews with stakeholders. About two dozen project characteristics are considered, and their association with economic growth is studied using a novel methodology. Based on the findings, the study concludes with recommendations for cohesion policy reform.

By: Zsolt Darvas, Antoine Mathieu Collin, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: June 11, 2019
Read article More on this topic More by this author

Opinion

Europe’s citizens say they want a more political EU

The recent European Parliament election suggests that a growing share of European voters sees things differently from national governments. Whereas citizens clearly used their votes to express policy preferences, very few governments are ready for a more political EU leadership.

By: Jean Pisani-Ferry Topic: European Macroeconomics & Governance Date: June 4, 2019
Read article More on this topic More by this author

Podcast

Podcast

Deep Focus: Striving for research excellence with Horizon Europe

In this episode of 'The Sound of Economics', Reinhilde Veugelers speaks about her recent Bruegel paper, requested by the European Parliament, on using public resources to improve the EU's potential to be a global centre of excellence for research in the next decade.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 4, 2019
Read article More on this topic

Blog Post

A European atlas of economic success and failure

Economic growth was diverse across EU regions, yet it is crucial to control for region-specific factors in assessing growth performance. We find that there are rather successful regions in many EU countries, suggesting that the EU can provide a good framework for growth. Yet the worst performers are more concentrated in some countries, suggesting that country-specific factors can play a major role in regional development.

By: Zsolt Darvas, Jan Mazza and Catarina Midoes Topic: European Macroeconomics & Governance Date: June 3, 2019
Read article More on this topic More by this author

Blog Post

European Parliament election results: The long view

Following the latest European elections, the author updates his previous analysis of trends in the share of European Parliament seats among ‘mainstream’ and ‘non-mainstream’ parties.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: May 29, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Reflections on the European elections

Bruegel director Guntram Wolff hosts Ferdinando Giugliano, columnist for Bloomberg and La Repubblica, and Krzysztof Blusz, political analyst and senior fellow at WiseEuropa – Centre for European Strategy, for a discussion about the results of the European elections, both across Europe and within the states of Italy and Poland.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: May 29, 2019
Load more posts