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 about event More on this topic
 

Upcoming Event

Sep
1
12:30

The EU recovery fund - state of play and outlook

Bruegel Annual Meetings, Day 1- In this session we will discuss the EU recovery fund, its state of play and outlook.

Speakers: Nadia Calviño, Karolina Ekholm 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

Sep
2
10:00

Conversation on the recovery programmes

Bruegel Annual Meetings, Day 2- In this session, we discuss the recovery programmes.

Speakers: Maria Demertzis, Henry Foy and Tadeusz Kościński Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event
 

Upcoming Event

Sep
2
13:00

European banks: under global competitive pressure?

Bruegel Annual Meetings, Day 2 - European banks have lost stature and remain generally low-profitability, low-valuation in comparison to their global peers. Is that a problem? If so, what can EU policymakers do to address it?

Speakers: José Antonio Álvarez Álvarez, Mairead McGuinness and Nicolas Véron Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
2
15:45

Blending physical and virtual: shaping the new workplace

Bruegel Annual Meetings, Day 2 - This panel will cover the changes the COVID-19 pandemic made to our workplaces, and what to expect in the near future.

Speakers: Nicholas Bloom, Michael Froman, Mario Mariniello, Sara Matthieu and Luca Visentini Topic: European Macroeconomics & Governance Location: Academy Palace
Read about event More on this topic
 

Upcoming Event

Sep
3
09:00

The role of the EU's trade strategy for an inclusive and sustainable recovery

Bruegel Annual Meetings, Day 3 - We are delighted to welcome Valdis Dombrovskis, Executive Vice President of the European Commission for An Economy that Works for People to talk about Europe's trade strategy.

Speakers: Valdis Dombrovskis, Alicia García-Herrero and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read about event More on this topic
 

Upcoming Event

Sep
3
10:15

Conference on the Future of Europe: envisioning EU citizens engagement

Bruegel Annual Meetings, Day 3 - Panellists will discuss different options and what they may entail while revisiting the debates on the future of Europe at national and EU-level that have been conducted thus far.

Speakers: Caroline de Gruyter, Kalypso Nicolaïdis, Niclas Poitiers and György Szapáry Topic: European Macroeconomics & Governance Location: Palais des Academies, Rue Ducale 1
Read article
 

Blog Post

Will European Union recovery spending be enough to fill digital investment gaps?

The recovery facility will boost digital transformation, but questions remain whether it will be sufficient to achieve Europe’s digital ambitions.

By: Zsolt Darvas, J. Scott Marcus and Alkiviadis Tzaras Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 20, 2021
Read article Download PDF
 

Policy Contribution

A new direction for the European Union’s half-hearted semiconductor strategy

The EU needs a more targeted strategy to increase its presence in this strategic and thriving sector, building on its existing strengths, while accommodating its relatively low domestic needs.

By: Niclas Poitiers and Pauline Weil Topic: European Macroeconomics & Governance, Innovation & Competition Policy Date: July 15, 2021
Read article More by this author
 

Blog Post

Fit for 55 marks Europe’s climate moment of truth

With Fit for 55, Europe is the global first mover in turning a long-term net-zero goal into real-world policies, marking the entry of climate policy into the daily life of all citizens and businesses.

By: Simone Tagliapietra Topic: Energy & Climate, European Macroeconomics & Governance Date: July 14, 2021
Read article More on this topic
 

Blog Post

Fair vaccine access is a goal Europe cannot afford to miss – July update

European countries must do more to tackle the vaccine uptake gap. Vaccination data should be published at the maximum granularity level so researchers and local decision-makers can monitor progress.

By: Lionel Guetta-Jeanrenaud and Mario Mariniello Topic: European Macroeconomics & Governance Date: July 14, 2021
Read article More by this author
 

Blog Post

SPACs in the gap

Special-purpose acquisition vehicles could fill a gap in European equity markets and lure risk-averse investors off the sidelines.

By: Rebecca Christie Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: July 13, 2021
Read article More on this topic
 

Blog Post

A breakdown of EU countries’ post-pandemic green spending plans

An analysis of European Union countries’ recovery plans shows widely differing green spending priorities.

By: Klaas Lenaerts and Simone Tagliapietra Topic: European Macroeconomics & Governance Date: July 8, 2021
Load more posts