11 June 2013

FT: Bundesbank in court clash with ECB over bond-buying plan

Jörg Asmussen, a member of the ECB’s executive board, told Germany’s constitutional court in Karlsruhe the offer to buy the bonds of countries subject to speculative attack was necessary to rescue the eurozone from a credit crunch and potential deflationary spiral. But Jens Weidmann, the Bundesbank president who sits on the ECB’s 23-strong governing council, said the plan amounted to a dangerous mix of monetary and fiscal policy and put German taxpayers at risk.

At issue is the ECB’s outright monetary transactions policy, a thus-far unused proposal to buy the bonds of countries that become subject to speculation they may leave the eurozone. At stake are two competing visions of monetary policy. One, represented by Mr Weidmann, is that central banks must cleave narrowly to their job of controlling inflation and ignore almost everything else, which must be left to elected politicians to deal with. The other view, defended robustly by Mr Asmussen, ECB executive board member, is that the central bank is allowed under the treaties that established it to conduct unorthodox crisis-fighting measures such as the Outright Monetary Transactions bond-buying programme it announced last September.

“Secondary market [bond] purchases should not in my understanding be used in a European currency union to lower the solvency risk premiums of individual countries”, Mr Weidmann told the court. “Because that, among other things, threatens to annul the disciplining role of market interest rates and undermine financial responsiblity.”

Mr Asmussen argued the OMT programme did not relieve countries of the need to reform their own economies as they would have to sign up to rescue plans monitored by the EU’s bailout fund, the International Monetary Fund and the European Commission. But, in a clear attempt to assuage German fears of the unlimited nature of the OMT plan, he said the bond purchases were “factually limited” because the plan only targets bonds with a maturity of between one and three years and there is a limit to the number of these in circulation.

In a sign of how seriously the ECB takes the potential negative consequences on German public opinion of the court hearings, Mario Draghi, ECB president, gave a rare broadcast interview to Germany’s ZDF television on the eve of the hearings. “The risk to German taxpayers is considerably lower today than it was a year ago”, Mr Draghi said, addressing the fundamental concern in Germany that its citizens will eventually end up paying the bill for economic problems elsewhere in the eurozone. “I can guarantee that we won’t simply inflate our way out of debt”, he added, taking on another commonly-held German concern. 

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© Financial Times