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.

Read article More on this topic More by this author
 

Podcast

Podcast

REOPENING EUROPE - Reopening Common Good?

What should be the ground rules to support more sustainable business in a post-pandemic world?

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: August 12, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

REOPENING EUROPE - Reopening Tourism?

In this episode we unpack some reflections about tourism we have collected during the Reopening Europe journey.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: August 5, 2020
Read about event
 

Upcoming Event

Sep
1-3
09:00

Bruegel Annual Meetings 2020

The Annual Meetings are Bruegel's flagship event which gathers high-level speakers to discuss the economic topics that affect Europe and the world.

Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Podcast

Podcast

REOPENING EUROPE - Reopening Borders?

In June 2020, as Europe reopened after lockdown, we crossed ten national borders. We listened to diverse citizens, from passers-by to politicians, business people to artists, recording, documenting, and publishing stories.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 29, 2020
Read article
 

Blog Post

Is the EU Council agreement aligned with the Green Deal ambitions?

On 21 July, EU leaders agreed on a €1.8 trillion package that should boost the recovery after the COVID-19 crisis, but also contribute to the advancement of key EU societal objectives, starting with the climate transition. In this blog post we assess the green ambitions of the package and evaluate its consistency with the European Green Deal.

By: Grégory Claeys and Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 23, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

REOPENING EUROPE - Reopening Governance?

This is a summer feature of the Sound of Economics in cooperation with the Reopening Europe project.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 23, 2020
Read article More on this topic More by this author
 

Blog Post

Having the cake, but slicing it differently: how is the grand EU recovery fund allocated?

The European Commission’s original allocation mechanism really favoured lower-income countries and to a large extent was based on pre-COVID economic data. The modification adopted by the European Council gives more consideration to the country size and the adverse economic impact of COVID-19. As a consequence, by using the Commission’s May 2020 economic forecasts, I estimate that only Germany and France will get more grants from the EU’s recovery fund compared to the Commission’s original proposal, while other countries will get less.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: July 23, 2020
Read article More by this author
 

Opinion

The EU’s Opportunity to Turn Its Markets Toward the Future

Meeting the fiscal demands of COVID-19 will require the European Union to borrow on capital markets more than ever, and for European pension funds and households to look more widely for ways to build their nest eggs safely. The EU should take the challenges of the pandemic and Brexit as a chance to get its financial infrastructure house in order.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 16, 2020
Read article More by this author
 

Podcast

Podcast

The benefits of the single market - the case of last enlargement

As the Brexit negotiations are entering their final straight line, the question of trade agreements is heating up. Economists talk about the “cost of non Europe”. How much each country has gained from belonging to the EU’s single market? How much would it have missed out on if it didn’t belong to the single market? […]

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: July 15, 2020
Read article More on this topic
 

Blog Post

Ukraine: trade reorientation from Russia to the EU

Over the past five years conflict has led to a deterioration of Russo-Ukrainian economic relations while ties with the EU have been deepened. This shift is evident in trade flows: the European Union has become Ukraine’s biggest trading partner, while China is poised to overtake Russia as its second. Natural gas imports from Russia, Ukraine’s prior Achilles heel, have been partially replaced by reverse deliveries from the EU and reduced as result of reform of the gas sector.

By: Marek Dabrowski, Marta Domínguez-Jiménez and Georg Zachmann Topic: European Macroeconomics & Governance Date: July 13, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

Apps without borders? How COVID-19 apps show the limits of the EU digital single market

In their toolkit against a pandemic that knows no borders, several EU countries have bet on new technology from our era of globalisation: digital contact tracing COVID-19 apps. But the way they've been rolled out illustrate troublesome limits to the EU digital single market.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: July 9, 2020
Read about event More on this topic
 

Past Event

Past Event

An EU budget for Europe's future with Johannes Hahn

How do we make the EU fit for future?

Speakers: Zsolt Darvas, Johannes Hahn and Mehreen Khan Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 7, 2020
Load more posts