Germany’s Bundesbank has issued a devastating attack on the bond rescue policies of the European Central Bank, rendering the eurozone’s key crisis measure almost unworkable.
The Draghi plan mobilized the ECB as lender of last resort and led to a spectacular fall in borrowing costs across the EMU periphery, buying nine months of financial calm
The hardline central bank - known as the temple of monetary orthodoxy - told
Germany’s top court that the ECB’s pledge to shore up Italian and Spanish
debt entails huge risks and violates fundamental principles. “It is not the
duty of the ECB to rescue states in crisis,” it wrote in a 29-page document
leaked to Handelsblatt.
The Bundesbank unleashed a point by point assault on every claim made by ECB
chief Mario Draghi to justify emergency rescue policies - or Outright
Monetary Transactions (OMT) - unveiled last summer to stop Spain’s debt
crisis spiralling out of control.
The Draghi plan mobilized the ECB as lender of last resort and led to a
spectacular fall in borrowing costs across the EMU periphery, buying nine
months of financial calm. The credibility of the pledge rests entirely on
German consent. Analysts say the crisis could erupt again at any moment if
that is called into question.
“The report borders on economic warfare,” said Harvinder Sian from RBS. “We
think there is going to be fear and dread in the market that the court will
reject OMT.”
The document said OMT entails the purchase of “bad bonds”, violates ECB
independence and entails a high risk of heavy losses in the “not unlikely”
event that debtor states are forced out of EMU.
It said Greek debacle had shown that conditions cannot be enforced, and, in
any case, is “very questionable” whether it is desirable to drive down the
borrowing costs of profligate states.
To cap it all, the Bundesbank said the ECB has no mandate to uphold the “current composition of monetary union”. Its task is to uphold price stability and let the chips fall where they may.
While the Bundesbank's president, Jens Weidmann, has openly criticised the Draghi plan before, the aggressive language in the report shocked economists. The document was submitted in December but was not revealed until Friday.
Germany’s constitutional court will rule on the legality of the bond rescue plan on June 12. It gave a provisional go-ahead last September for other parts of the EMU rescue machinery, but limited Germany’s bail-out share to €190bn (£160bn). Crucially, it warned that the Bundestag may not alienate its tax and spending powers to any supra-national body or be exposed to “unlimited” liabilities.
“If the court rules against OMT, it means the end of the euro. The stakes are so high that I don’t see how they could just pull the trigger,” said Mats Persson from Open Europe.
He said the Draghi plan is a legal hot potato because it is, by definition, unlimited. “The previous rulings by the court have all been predicated on this point.”
German historian Michael Stürmer said the tough report is a bid by the Bundesbank to “reassert its primacy”. “They have told the ECB in no uncertain terms that it is exceeding its mandate. Angela Merkel may be smiling because this helps her set limits in Europe.”
Prof Sturmer said the forthcoming ruling - wider than just the Draghi plan - is “much more serious” than last September’s judgment, limited to an injunction brought by eurosceptic groups. “This is about issues of sovereignty. I don’t think the Court will dare to issue a ruling before the elections in September. They will procrastinate,” he said.
The court has some jurisdiction over ECB policy because it intrudes on the German Grundgesetz, or Basic Law. “Once the ECB starts bailing out states it is moving into dangerous waters,” he said.
The court made a glancing reference to OMT in September, stating that ECB bond purchases “aimed at financing the members budgets is prohibited, as it would circumvent the ban on monetary financing”.
The bond markets ignored the leaked report on Friday, confident that the court will once again find some formula to avert a crisis. It could cite a clause in the Lisbon Treaty stating that the ECB has a duty to “support the general economic policies in the Union”, which would include saving the euro.
“They might refer the case to the European Court but that would leave the Sword of Damocles hanging over the market for another two years,” said David Marsh, author of books on the Bundesbank and EMU. “I think use of OMT is practically impossible until this is resolved.”
Sovereign bond strategist Nicholas Spiro said markets are “sick and tired” of the eurozone debt crisis and have stopped paying attention to the detail. “There is this ravenous hunt for yield and they think there is all this money coming from Japan. But it has long been unclear whether OMT is real or just a myth, and the eurozone’s underlying economic crisis is still getting worse. The window of opportunity created by Draghi has been wasted.
“If the court sides with the Bundesbank in any way the whole house of cards could come crashing down.”
To cap it all, the Bundesbank said the ECB has no mandate to uphold the “current composition of monetary union”. Its task is to uphold price stability and let the chips fall where they may.
While the Bundesbank's president, Jens Weidmann, has openly criticised the Draghi plan before, the aggressive language in the report shocked economists. The document was submitted in December but was not revealed until Friday.
Germany’s constitutional court will rule on the legality of the bond rescue plan on June 12. It gave a provisional go-ahead last September for other parts of the EMU rescue machinery, but limited Germany’s bail-out share to €190bn (£160bn). Crucially, it warned that the Bundestag may not alienate its tax and spending powers to any supra-national body or be exposed to “unlimited” liabilities.
“If the court rules against OMT, it means the end of the euro. The stakes are so high that I don’t see how they could just pull the trigger,” said Mats Persson from Open Europe.
He said the Draghi plan is a legal hot potato because it is, by definition, unlimited. “The previous rulings by the court have all been predicated on this point.”
German historian Michael Stürmer said the tough report is a bid by the Bundesbank to “reassert its primacy”. “They have told the ECB in no uncertain terms that it is exceeding its mandate. Angela Merkel may be smiling because this helps her set limits in Europe.”
Prof Sturmer said the forthcoming ruling - wider than just the Draghi plan - is “much more serious” than last September’s judgment, limited to an injunction brought by eurosceptic groups. “This is about issues of sovereignty. I don’t think the Court will dare to issue a ruling before the elections in September. They will procrastinate,” he said.
The court has some jurisdiction over ECB policy because it intrudes on the German Grundgesetz, or Basic Law. “Once the ECB starts bailing out states it is moving into dangerous waters,” he said.
The court made a glancing reference to OMT in September, stating that ECB bond purchases “aimed at financing the members budgets is prohibited, as it would circumvent the ban on monetary financing”.
The bond markets ignored the leaked report on Friday, confident that the court will once again find some formula to avert a crisis. It could cite a clause in the Lisbon Treaty stating that the ECB has a duty to “support the general economic policies in the Union”, which would include saving the euro.
“They might refer the case to the European Court but that would leave the Sword of Damocles hanging over the market for another two years,” said David Marsh, author of books on the Bundesbank and EMU. “I think use of OMT is practically impossible until this is resolved.”
Sovereign bond strategist Nicholas Spiro said markets are “sick and tired” of the eurozone debt crisis and have stopped paying attention to the detail. “There is this ravenous hunt for yield and they think there is all this money coming from Japan. But it has long been unclear whether OMT is real or just a myth, and the eurozone’s underlying economic crisis is still getting worse. The window of opportunity created by Draghi has been wasted.
“If the court sides with the Bundesbank in any way the whole house of cards could come crashing down.”
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