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.

View comments
Read article More on this topic More by this author

Blog Post

Opening speech by Bruno Le Maire

Bruno Le Maire, minister of the economy and finance, delivered the opening speech at Bruegel's event “The Eurozone agreement – a mini revolution?”, 8 July 2019.

By: Bruno Le Maire Topic: European Macroeconomics & Governance Date: July 9, 2019
Read article More on this topic

Blog Post

‘Lo spread’: The collateral damage of Italy’s confrontation with the EU

The authors assess whether the European Commission's actions towards Italy since September 2018 have had a visible impact on the spread between Italian sovereign-bond yields and those of Germany, and particularly whether the Commission’s warnings have acted as a ‘signalling device’ for bond-market participants that it might be difficult for Italy to obtain the support of the ESM or the ECB’s OMT programme if needed.

By: Grégory Claeys and Jan Mazza Topic: European Macroeconomics & Governance Date: July 8, 2019
Read article More by this author

Blog Post

It’s hard to live in the city: Berlin’s rent freeze and the economics of rent control

A proposal in Berlin to ban increases in rent for the next five years sparked intense debate in Germany. Similar policies to the Mietendeckel are currently being discussed in London and NYC. All three proposals reflect and raise similar concerns – the increase in per-capita incomes is not keeping pace with increases in rents, but will a cap do more harm than good? We review recent views on the matter.

By: Inês Goncalves Raposo Topic: European Macroeconomics & Governance Date: July 8, 2019
Read about event More on this topic

Past Event

Past Event

Eurozone agreement: a mini revolution?

What does the new Eurozone budget do, and what does it not do? What are its strengths and weaknesses?

Speakers: Bruno Le Maire and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 8, 2019
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: Priorities for the new ECB president

In this Director's Cut of 'The Sound of Economics', Guntram Wolff talks to two of the authors of Bruegel's memo to the new ECB president, Maria Demertzis and Grégory Claeys, to specify the most important issues at the beginning of this eight-year cycle and to clarify the parameters within which the new incumbent will have to work.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 4, 2019
Read article Download PDF

Policy Brief

The threats to the European Union’s economic sovereignty

Memo to the High Representative of the Union for Foreign Affairs and Security Policy. The authors describe the current context and the increasing interlinkages between economics and power politics and the role to play in reinforcing and defending Europe’s economic sovereignty.

By: Jean Pisani-Ferry and Guntram B. Wolff Topic: European Macroeconomics & Governance, Global Economics & Governance Date: July 4, 2019
Read article Download PDF More on this topic

Policy Brief

Preparing for uncertainty

Memo to the president of the European Central Bank. Grégory Claeys, Maria Demertzis and Francesco Papadia present the challenges that the next ECB president will face during the upcoming mandate, reinventing monetary policy in a system riddled with uncertainties.

By: Grégory Claeys, Maria Demertzis and Francesco Papadia Topic: European Macroeconomics & Governance Date: July 3, 2019
Read about event

Upcoming Event

Sep
4-5
08:30

Bruegel Annual Meetings 2019

Bruegel's 2019 Annual Meetings will be held on 4-5 September and feature the launch of Bruegel's Memos to the New European Commission.

Speakers: Lorenzo Bini Smaghi, Laurence Boone, Claire Bury, Vítor Constâncio, Zsolt Darvas, Maria Demertzis, Ottmar Edenhofer, Baroness Kishwer Falkner of Margravine, Alicia García-Herrero, Danuta Hübner, Mikaela Gavas, José Manuel González-Páramo, Mathew Heim, Yi Huang, Korbinian Ibel, Pascal Lamy, Päivi Leino-Sandberg, Ann Mettler, Ashoka Mody, Mateusz Morawiecki, Mark Leonard, Stefano Manservisi, Erik F. Nielsen, Florence Parly, Jean Pisani-Ferry, Lapo Pistelli, Lucrezia Reichlin, Joakim Reiter, André Sapir, Olaf Scholz, Sena Siaw-Boateng, Philipp Steinberg, Alexander Stubb, Ezequiel Szafir, Laura Tyson, Nicolas Véron, Reinhilde Veugelers, Emmanuelle Wargon, Sabine Weyand, Thomas Wieser, Guntram B. Wolff and Georg Zachmann Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Palais des Academies, Rue Ducale 1, 1000 Brussels
Read article More on this topic More by this author

Podcast

Podcast

Director's Cut: ECB monetary policy decisions deconstructed

In this Director’s Cut, Bruegel’s Grégory Claeys and Maria Demertzis take a deeper look at whether the monetary policy decisions made by the ECB over the past three presidential eras arrived by consensus, by unanimity or by majority votes of the governing council.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: June 27, 2019
Read article More on this topic

Blog Post

The evolution of the ECB governing council's decision-making

Before it is decided who will chair the governing council for the next eight years, the authors look back and examine precisely how decisions have been taken since the ECB was created – by unanimity, by majority, or by consensus.

By: Grégory Claeys and Tanja Linta Topic: European Macroeconomics & Governance Date: June 27, 2019
Read article More on this topic More by this author

Blog Post

Where Brexit goes, the law shall follow

How the financial industry and the law firms that support it are preparing for what comes next

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: June 25, 2019
Read about event More on this topic

Past Event

Past Event

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 Date: June 25, 2019
Load more posts