WORLD NEWS

FRANKFURT, June 10: “It’s really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent time,” European Central Bank chief Mario Draghi said last week of what has proven to the most powerful weapon in the ECB’s crisis- fighting armoury, reports AFP.
But Germany’s highest tribunal, the Constitutional Court, will examine this week whether the ECB’s “big bazooka”, or Outright Monetary Transaction (OMT), is compatible with the country’s Basic Law.
Ever since the ECB unveiled the scheme to buy up the sovereign debt of the euro area’s most debt-wracked members last summer, fears of a break-up of the single currency have indeed receded.
Europe’s storm-battered financial markets have enjoyed a period of relative calm, without a single OMT ever being carried out.
Nevertheless, like many of the ECB’s emergency anti-crisis measures, the OMT has its critics — both in the pro-euro and anti-euro camps — who claim it is unconstitutional.
And the Karlsruhe-based court — which already threw out similar objections to the eurozone’s bailout mechanisms — will now turn its attention to the OMT.
The court’s decision last year to give the green light to the rescue funds known as the ESM and the EFSF was a watershed in the eurozone’s battle to resolve its long and debilitating debt crisis.
Had Germany, Europe’s main paymaster, (or any other country for that matter) rejected the bailout mechanisms, they would not have been able to come into effect, with disastrous consequences for the single currency and its survival.
This time round, the case is different.
While the EFSF and the ESM were set up by governments, the OMT programme is the brainchild of the ECB itself, drawn up within its own monetary policy mandate, which is by definition independent and must remain free from any political interference.
Very strict conditions have been laid down if a country wants to be eligible to the OMT scheme and the ECB has said it will decided on a case-by-case basis whether to grant a country access.
“Technically speaking, the court cannot render a judgement on the ECB, which falls under the jurisdiction of the European Court of Justice. This means that the German court cannot interdict the OMT,” said ING-DiBa economist Carsten Brzeski.
The Constitutional Court will not issue any judgement this week, but most likely in the autumn, once Germany’s general elections are out of the way.
UniCredit economist Alexander Koch predicted that the “most likely outcome will be another ‘Yes-but’.”
“Yes, the OMT is in line with German Basic Law. But some additional remarks or even requirements could be made,” he suggested.
The Bundesbank and its chief Jens Weidmann have been among the vocal critics of the OMT scheme.
So Berenberg Bank chief economist Holger Schmieding said the hearing in Karlsruhe will see the the Bundesbank “pitted directly and very openly against the ECB.”
Weidmann argues that substantial purchases of government bonds by the central bank is tantamount to financing governments by printing money, something which is expressly forbidden by the ECB’s statutes.
He also believes that the scheme would circumvent the proper functioning of the financial markets and lower the pressure on governments to get their finances in order.
But the ECB, which will be represented by Joerg Asmussen, a German former deputy finance minister who now sits on the ECB’s executive board, argues that the OMT safeguards financial stability and help restore the monetary policy channels through which central bank rates steer the economy.
And that is in line with the ECB’s overriding task of ensuring price stability.
For Natixis economist Johannes Gareis, the hearings will be a showdown between “the Bundesbank’s strict principles on the one side and the ECB’s pragmatism on the other.”
Berenberg’s Schmieding said the Constitutional Court “cannot order Germany to abandon the euro or the Bundesbank to leave the European System of Central Banks (ESCB).
“But it could theoretically ask the German government to enter negotiations with its European partners to rectify any perceived legal defect and/or order the Bundesbank not to take part in some of the ECB’s actions.”
Given the positive effect that the mere existence of the OMT has had on the financial markets so far, “we do not expect the court to spoil the healing process” and ban the programme, Schmieding said.
ECB chief Draghi also did not appear to be unduly worried.
“I’m absolutely confident that the court will decide in total independence and will analyse, will consider with thoroughness, fairness and competence all the advice from all sides,” he said.