Before Marcel Fratzscher was named president of the German Institute for Economic Research (DIW), he worked as head of International Policy Analysis at the European Central Bank (ECB). He has often defended the ECB against its critics. In an interview with Handelsblatt, he praised Tuesday’s decision by the Karlsruhe-based Federal Constitutional Court to reject a legal challenge to the ECB’s emergency bond-buying scheme.
Conceived at the height of Europe’s debt crisis, the Outright Monetary Transactions (OMT) program was launched as part of ECB President Mario Draghi’s pledge to do “whatever it takes” to preserve the euro, giving the bank powers to buy the debt of financially strained members. The European Court of Justice had already cleared OMT.
Mr. Fratzscher, what’s your assessment of the German Constitutional Court’s decision?
The decision by the German Constitutional Court is wise, because it has now brought an end to the charges being brought against the ECB. The German Constitutional Court now recognizes the authority and the decision by the European Court of Justice on the OMT rescue program, which was about buying bonds. But the decision is also a backtracking from the first ruling from the constitutional court. My feeling is that it was most of all about avoiding a conflict with the European Court of Justice and saving face. Because the constitutional court could only have lost.
What are the consequences of the ruling?
The accusation that the ECB would be providing state financing with the OMT program, were it ever to be implemented, is now no longer an issue. However, the German Constitutional Court is leaving a backdoor open for itself with its decision. It can continue to intervene in European legal issues in the future if they infringe on national law. But in reality its call on the German government to keep better tabs on what the ECB does in the future won’t affect the European Central Bank’s ability to take action.
With its latest ruling, the Constitutional Court has made a turnabout. With its first ruling, concerns were still being voiced because the court saw the purchasing of bonds of individual euro countries as being too much like economic policy.
This argument implies that the ECB wasn’t taking its price stability mandate seriously. It is its task to ensure a price increase of about 2 percent in the euro zone. That goal was in danger when the ECB launched the OMT program in 2012. That is why it was forced to act, otherwise it would have violated its mandate.
The founders of the euro imposed clear limits on the ECB. It’s forbidden to finance states through monetary policy. But when the central bank buys bonds from individual countries specifically to push down their interest rates, that is exactly what it is doing.
The question is, how do you define government financing. With its monetary policy a central bank also always affects the development of prices in the markets. A cut in interest rates also tends to make refinancing easier for governments. Bond purchases are a monetary policy instrument that almost all the major central banks around the world use. The central banks in Japan, the United States and Great Britain do so as well.
Europe’s central bank took the pressure off the governments with its announcement of unlimited purchasing of individual countries’ bonds. Didn’t that result in important reforms being postponed?
The ECB’s independence rests on it fulfilling its mandate of price stability and not making any political decisions. The OMT program was necessary to ensure price stability. It would be very problematic if the ECB ignored its goal of price stability in order to force governments to implement reforms. That would make it a political player.
This interview was conducted by Jan Mallien, who covers economic policy. To contact him: firstname.lastname@example.org.