Mario Draghi’s famed “Whatever It Takes” speech, delivered on July 26, 2012, at an investors’ conference in London, is now the subject of a trial at the European Court of Justice. What the European Central Bank president was referring to was a program, unveiled later that year, in which the ECB made a promise to buy unlimited amounts of bonds from ailing euro zone countries if needed.
Mr. Draghi’s pledge succeeded in calming market fears that the euro might be headed for collapse. But from politicians to the public, many Germans believe this measure is inappropriate; it is the central bank’s job to ensure stable prices, and nothing more. Buying bonds, they fear, is a too much like printing money. Some politicians and professors challenged the plans before Germany’s Federal Constitutional Court, arguing that the measure is veiled government financing – in other words that the ECB would be exceeding its authority.
In February, Germany’s highest court came to the conclusion that the program is illegal – but also said it had no authority to decide on the matter. Now, the case is with the European Court of Justice. Hearings began this week, though a decision isn’t likely until next year. In this editorial, Jens Münchrath argues the European court should not be afraid to put limits on the ECB.
“We broke the law to save the euro.” Christine Lagarde uttered those words in 2011. At the time, she was serving as French finance minister – now she’s the managing director of the International Monetary Fund. In its bluntness and honesty, her statement was downright audacious for a politician with such weighty governmental responsibilities.
Some three years later, politicians and legal experts continue to fight over whether laws were broken in the struggle to hold the monetary union together. At the center of the current debate is not how governments supposedly circumvented the ban on bailouts, but the role taken by the European Central Bank.
Hearings before the European Court of Justice began Tuesday in Luxembourg. Ostensibly, the trial seeks to determine whether the ECB exceeded its mandate by pledging to purchase government-issued bonds in a plan called Outright Monetary Transactions (OMT). The question is whether the OMT plan violates a ban on monetary financing of governments which is set out in European Union treaties.
But the case opens up some more fundamental issues: What is the region’s monetary policy and what are its limitations? How much redistribution should be allowed within a monetary union, while passing over countries’ parliaments? Will the ECB remain Europe’s most powerful authority on economic and financial policy?
The first of these questions needs to be answered in order to respond to the others. But this might prove to be too much for the judges.
The legal experts are already in tricky territory as can be seen in arguments made by the judges at the German Constitutional Court. They passed the complaint on to be decided by the European court like a hot potato, though they also wanted to have a say. They did manage to state that the OMT program is illegal.
The German court says the central bank may not intervene in market pricing by buying up government-issued bonds. The ECB says intervening in market pricing is the very essence of what a monetary policy does.
Germany’s highest judges obviously tried to do too many things at once when they tried to decide where to draw the line between what is allowed to keep the market healthy and what counts as illegal financing of governments. There are fears that the ECJ will also founder on this question.
The German court found that the central bank may not intervene in market pricing by buying up government-issued bonds. The ECB said intervention in market pricing of assets is the very essence of what monetary policy does – while arguing that they have addressed irrational fears of a monetary union breakup through the OMT program.
But which judge would want to decide whether the high yield premiums of the ailing countries’ bonds reflect only the skepticism of financial markets worried about excessive debt – or whether such high-yield spreads can be traced to the irrational fears cited by the ECB, for which the countries’ governments were partially responsible?
Clarification of this question is required in order to make a credible judgment as to whether the purchase of government-issued bonds constitutes banned monetary government financing.
The program’s efficiency is undeniable, but this should not factor in the legal evaluation of the OMT. Even the fact that ECB President Mario Draghi has not purchased a single government bond since announcing the program is irrelevant from a judicial perspective
The ECB has been arguing purely from an economic standpoint until now. Ultimately the German court’s judges, who were critical of the ECB, won’t be able to ignore the simple fact that monetary policy always involves a redistribution of risk. And the judges in Luxembourg, who are more friendly to the ECB, can’t be averse to setting at least symbolic limits on an institution that seems convinced it can set its own limits.
There are signs of a compromise in this legal dispute. One way or another, the ECJ is likely to take the German court judges’ concerns into consideration, without restricting the effectiveness of the ECB, because a lot is at stake and all parties know it.
In the long term, it is ultimately up to European governments to decide what kind of monetary union they want, how much redistribution between the governments is allowed and what role the central banks should play in all of it.
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