German court scrutinizes ECB’s bond buying

The European Central Bank on Tuesday defended its controversial bond purchase scheme, credited with pulling back the eurozone from the brink of collapse last year, in front of the Germany's highest tribunal, the Constitutional Court.

German court scrutinizes ECB's bond buying
Photo: DPA

Critics of the ECB’s “Outright Monetary Transactions” (OMT) have asked the court to examine whether the scheme is in line with Germany’s Basic Law or whether it breaches the central bank’s mandate.

Bundesbank President Jens Weidmann, one of the most vocal critics of the scheme, will give his expert opinion during two days of hearings which began Tuesday, as will ECB executive board member Jörg Asmussen.

German Finance Minister Wolfgang Schäuble, too, addressed the court. It was “up to the ECB to decide, within its wide remit, which are the correct monetary policy measures to take,” the minister insisted.

As a European institution, ECB actions did not fall under the jurisdiction of the constitutional court, Schäuble argued.

If it did, then the ECB would also have to answer to a whole range of national constitutional courts with possibly very different rulings.

The German government “sees no sign that the measures breach the ECB’s mandate,” which was to safeguard price stability, Schäuble insisted. The ECB “cannot solve member countries’ problems, but only buy them time,” he said.

Furthermore, no bond purchases had yet been made under the OMT scheme “and

so it can only be judged when a corresponding decision has been made,” the

finance minister argued.

Ever since the ECB unveiled the OMT to buy up the sovereign debt of the euro area’s most debt-wracked members last August, 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 oversteps the central bank’s mandate and is unconstitutional.

They filed similar complaints against the eurozone’s EFSF and ESM bailout funds last year, but their objections were thrown out by the Constitutional Court last September. The OMT is different, however.

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 for support from the OMT scheme and the ECB has said it will decide on a case-by-case basis whether to grant a country access.

The plaintiffs, a diverse group of German politicians, lawyers and citizens, argue the ECB is creating risks for German taxpayers that their elected representatives cannot control.

While the Constitutional Court is not expected to make a ruling on the OMT before the autumn, observers suggested the two days of hearings could become a sort of showdown between the Bundesbank and the ECB. But Bundesbank chief Weidmann denied that would be the case.

“It’s not about two central banks fighting before the court,” Weidmann was quoted by Dow Jones Newswires as saying at a Bundesbank conference in Frankfurt on Monday.

“Two representatives of the central banks were invited as experts and will answer the court’s questions,” he added.

Asmussen told the mass-circulation daily Bild in an interview on Monday that “we’ve been invited as experts and the hearings will provide a good opportunity to explain the advantages of the OMT.”

In an interview with German public television on Monday, ECB president Mario Draghi defended the OMT programme and rejected concerns that the scheme was effectively a way of printing money to pay for governments’ debts.

“It will only come into action if confidence in the euro fails, not to finance states,” Draghi said.

“We won’t intervene to ensure a country’s solvency,” he said.

And Draghi insisted that the “risks for German taxpayers are much less than they were a year ago.”


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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.