German court considers ECB bond-buying policy

Frankfurt's two central banks, the European Central Bank and the Bundesbank, clashed yesterday over whether the ECB needs tighter rules for its euro crisis bond-buying programmes.

While Bundesbank president Jens Weidmann suggested additional regulations might copper-fasten euro area monetary policy, ECB officials warned that such efforts could open a political and financial Pandora's box.

On the second day of hearings in Karlsruhe, German constitutional court judges asked top bank officials and economists whether they thought the ECB’s “Outright Monetary Transactions” (OMT) – an unlimited bond-buying facility announced last year but yet to be activated – adhered to ECB rules. Of particular interest to the judges was OMT’s relationship to article 123 of the European treaty, which forbids the bank from buying directly sovereign bonds of euro members.

German complainants in Karlsruhe say this ban could be undermined by the OMT, which allows indirect bond buy-ups, and potentially expose German taxpayers to unacceptable financial risks.

Bundesbank head Jens Weidmann warned that “long-term problems could result” from the OMT, reflecting his bank’s long-standing concern that the euro crisis has seen creeping ECB involvement in fiscal policy. “It is possible that the ECB uses its unlimited firepower [with OMT] but the question then is whether this firepower is consistent with our mandate,” he said.

ECB board member Jörg Asmussen warned that demanding changes to the ECB rulebook could destabilise markets by opening the door to a “broad discussion about what else could be changed in the central bank’s mandate”.

German calls for more ECB regulation were less a certain answer to legal uncertainties over bond-buying, he said, and more a reflection of the rule-based culture in the euro’s largest member.

Earlier in the day leading German economists said that ECB bond-buying to stabilise crisis euro countries – over €200 billion and counting – had put the bank in a legal “grey area” between monetary and fiscal policy.

"I think the main effect of the ECB's policies is to ease access of [crisis] countries to financial markets," said Clemens Fuest, head of Mannheim's ZEW economic institute.

Asked by judges if the ECB had more effective crisis instruments than the OMT, such as its emergency liquidity assistance (ELA) facility, Mr Asmussen said his bank was “concerned” that ELA had, in some countries, “gone from the emergency instrument it was conceived to be into regular usage”.

Economist Hans-Werner Sinn said that ELA assistance to Irish banks had resulted in “hidden state financing” – forbidden under ECB rules.

A decision from Karlsruhe is expected in the autumn.