German judges refer ECB’s bond-buying programme to European court. Here’s what you need to know
European markets are muted and the euro is down 0.2 per cent against the dollar on the news that a German court has rejected the European Central Bank’s (ECB) bond-buying programme and pass it on to the European Court of Justice (ECJ).
Why’s this happened?
Germany’s constitutional court thinks the bank’s outright monetary transactions (OMT) programme goes beyond its mandate.
The programme, introduced by president Draghi in September 2012, allows the ECB to buy potentially unlimited numbers of government bonds.
While some have welcomed the German move – the European Commission included – others see OMT as the reinforcement of Draghi’s promise to “do whatever is necessary” to keep the Eurozone together.
The decision to refer the matter to the ECJ highlights the severity of the dispute over a programme which, although still unused, is widely credited with stabilising the Eurozone.
Both judges involved in the ruling said that the constitutional court should have rejected the suit as inadmissible, and that the OMT decisions should be down to parliament and government.
The German court said in a statement today:
There are important reasons to assume that it exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states and that it violates the prohibition of monetary financing of the budget.
But it added that, with more limitations in place, OMT could be constitutional.
Berenberg’s Christian Schulz has said this sounds like a “No, but” decision, but adds that the leniency the bank will probably receive from the ECJ, along with the time it buys because of the referral, means the German court seems to have paved the way for a future “Yes, but”.
Is it good news?
The euro area risk has great reduced over the past year and, as Ishaq Siddiqi of ETX Capital explains, a number of people reckon the OMT programme – part of the European Stability Mechanism (ESM) – is not needed anymore.
Is it bad news?
Siddiqi says Germany’s opposition “presents a stumbling block” for the ECB when it comes to its ability to consider using other tools if and when the Eurozone needs them.
And more, the worry is that the move could seriously knock confidence – which has been boosted by the programme – along with sparking new conflict.
Investors need a safety net
Mashall Gittler of Iron FX has called the decision “distinctly euro-negative”.
Although untapped, OMT effectively guarantees countries can raise enough to not default, says Gittller, and it’s the promise that brings calm and underlies the rally in the euro and European stocks.
The Eurozone’s crisis has “mostly been about confidence”, says Schulz, and investors might not wait for technicalities to make a call.
Does it actually make a difference?
Sebastien Galy of Societe Generale points out that inflation is close to deflationary levels in the euro area, despite the bank’s long-term refinancing operation (LTRO).
The US Fed, “which actually did the job”, is probably two to three year ahead of Europe in its business cycle, he says.
Witches had long danced in the night and cackled on this court case, wondering in their power to destroy the Eurozone.
They would save us from a massive surge of inflation as the ECB financed profligate governments.
It was the secret muttering of little dailies and client meetings from some banks hoping that the Eurozone would split up. Contempt is a word that keeps wanting to write itself.
What happens now?
The German court will rule on whether OMTs violate the bank’s mandate on 18 March.
The European court’s final decision will determine what limitations are put on the programme, which could take up to a year.
Be that as it may, the ECB’s going to have to move pretty speedily to assess what impact the ruling could have on what instruments it’ll be able to use to calm markets. Schulz:
Ironically, depending on the exact decision, the court may have made a much more wide-ranging quantitative easing programme at the ECB more likely.