14 May 2014

ECB/Mersch: ECB in between state rescue and monetary policy

Even though the title of today’s discussion may suggest otherwise, the ECB cannot, must not and will not "save" states. Our actions are based on our monetary policy mandate, as defined in Article 127 of the Treaty on the Functioning of the European Union (TFEU): the ECB is responsible for price stability in the euro area.

Like almost all central banks in the industrialised world, the ECB enjoys a high degree of independence. It provides protection, so that we can fulfil our mission free of political influence. At the same time, this privilege of political independence has a price: absolute respect for the limits of our mandate.

We have various instruments at our disposal to help us do justice to our mandate. The purchase of government bonds in the primary market is explicitly not among them because the monetary financing of governments is prohibited under the EU Treaty. Our mandate nevertheless includes the possibility of buying, under the appropriate conditions, government bonds on the secondary market (so-called “Outright Monetary Transactions” or OMTs), should this be necessary from a monetary policy perspective. Three conditions – disrupted transmission of monetary policy, conditionality and market access – are thus necessary but in no way sufficient conditions for OMTs. The Governing Council will decide about the possibility of OMTs in each case independently and only bearing in mind monetary policy needs.

OMTs also differ significantly from government bond purchases made by the EFSF or the ESM, which provide financial support to stressed countries. The EFSF and the ESM render – under strict conditions – financial assistance in order to preserve financial stability and they can improve the financing conditions of the affected countries. With OMTs, however, it is not a matter of aligning the financing conditions of the Member States of the euro area. OMTs do not aim to ensure uniform interest rates in the euro area. In a functioning market, risks are properly priced. OMTs should change nothing in that respect. Therefore, fundamentally justified interest rate differences or default risk premia are not the focus. OMTs should only cut unjustified interest rate peaks.

The ECB must not, cannot and will not replace the actions of democratically legitimised governments. On the contrary. OMTs are designed so that the market mechanism remains protected and the Member States are required to undertake necessary reforms.

In February, the Federal Constitutional Court submitted questions of a legal nature about the OMTs to the Court of Justice for a preliminary ruling. However, the Constitutional Court reserves the right to decide on the compatibility of OMTs with Germany’s constitution. With its submission, the Federal Constitutional Court is acting in a spirit of shared responsibility within a partnership of European courts. It respects the division of tasks between European and national legislation and can take the views of the European Court as the basis for its judgement. Conversely, the European Court of Justice will observe the limits of its jurisdiction and not intervene in the remit of the Federal Constitutional Court.

Full speech

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