ECB’s Asmussen warns German court not to undermine euro

The European Central Bank has delivered a blunt warning to Germany's highest court, telling it not to question its bond-buying programmes or risk unsettling the currency bloc.

Ahead of a two-day hearing into the bank’s outright monetary transaction (OMT) facility, German ECB board member Jörg Asmussen said too much poking around risked reviving the uncertainty that preceded the programme’s announcement last year.

"I have great respect for the court and will not give an independent institution any advice," Mr Asmussen said to the Bild daily. "But, generally speaking: no institution acts in a vacuum. If the bond programme had to be rolled back, it would have considerable consequences."

Last summer, ECB president Mario Draghi announced the bank was ready to buy-up on secondary markets as many bonds of crisis-hit countries as necessary to calm euro zone waters. The programme has yet to be activated but his words were enough to ease speculation about the currency's future.

“When we presented the programme, the euro was on the brink of a disorderly break-up,” added Mr Asmussen. “The ECB ... had to make clear to all speculators: do not take on the ECB; the euro will be defended.”

Today and tomorrow leading figures from Berlin and Frankfurt, including Mr Asmussen and German finance minister Wolfgang Schäuble, will face questioning by Karlsruhe’s red-robed judges. They will argue that, alongside its primary mandate of price stability, the ECB is obliged to pursue secondary priorities such as financial stability.

Mr Asmussen insistence yesterday that the ECB was "not in the dock" is technically correct – Karlsruhe has no jurisdiction over the Frankfurt central bank. However, leading German euro sceptics and bailout critics are confident they can convince the judges to consider the consequences of German participation in ECB-lead monetary policy.

Karlsruhe watchers believe the EU-friendly court is unlikely to halt the OMT programme, but they could demand safeguards or, if in doubt, refer the case to the European Court of Justice in Luxembourg.

Mr Asmussen will tell the court the programme was essential, legal and effective. But faces a dilemma: talk up the programme too much and he risks the ire of Karlsruhe; play it down or give too much away and he could undermine the programme’s perceived credibility or expose its limitations. At the weekend, a German newspaper, citing central bank sources, said it had set a €524 billion ceiling on the OMT scheme.

The ECB disputed this claim yesterday, saying there are “no ex-ante limits on the amount of” OMT.

A key issue for the case is whether the judges succeed in extracting more information on the programme. Complainants to Karlsruhe have had to base their lines of attack on the OMT press release from last year.

Leading the attack on the ECB is Frankfurt's other central bank, the Bundesbank. For years it has watched the shift in ECB monetary policy with increasing alarm. German critics say previous bond-buying – around €209 billion to date, including €13.6 billion to Ireland – has turned the ECB into a politically beholden European bad bank.

With OMT still unactived, the challenge facing complainants is how to present a concrete risk to the German taxpayer from theoretical concerns from a dormant bond-buying programme.

Prof Dietrich Murswiek, representing the Bavarian politician and veteran Karlsruhe complainant Peter Gauweiler, will argue that the bond-buying aim is not price stability -- the ECB's core mandate -- but to create alternative financing terms for member states parallel to financial markets.

Last September, in their ruling on the ESM bailout fund, the Karlsruhe judges ruled that it was “forbidden ... for the ECB to buy sovereign bonds on the secondary markets aimed at an independent financing of state budgets”.

To underline concerns about future ECB actions with the OMT programme, Prof Murswiek will raise the ECB’s recent mandate-stretching move on Irish promissory notes. The rescheduling of the emergency loans to Irish crisis-hit banks was attacked by German critics as monetary financing in all but name.

“Experts will be heard about how the ECB handles its mandate, in particular how it has a very loose approach to forbidden state financing,” said Prof Murswiek. “As a core element in this matter, the recent case of Ireland will be raised.”