FRANKFURT: Germany’s top court will Tuesday rule on whether a key crisis fighting tool of the European Central Bank (ECB) complies with its national law, kicking off a busy week for the ECB.
The following day the Frankfurt-based bank will launch a huge program of ultra-cheap bank loans to boost prices and kickstart the sluggish eurozone economy.
And on Thursday it will be on watch as Britons vote on whether to stay in the EU or leave, a decision that could spark panic in the financial markets.
The constitutional court is set to rule on Tuesday on whether the ECB’s 2012 bond-buying plan called Outright Monetary Transactions (OMT) complies with German law.
Activists charge the ECB overstepped its remit—technically as the bloc’s guardian of price stability—and assumed an economic policy role reserved for elected governments.
OMT—though never actually used—was part of ECB’s President Mario Draghi’s landmark
promise to do “whatever it takes” to save the battered euro at the height of the crisis in 2012.
That vow, backed by the announcement of the OMT program, helped reduce borrowing costs for the most debt-hit countries, calmed markets and brought the eurozone back from the brink.
The promise of OMT was that the ECB could, if necessary, buy up unlimited amounts of government bonds from debt-stricken countries that had pledged reforms such as Italy, Spain and Portugal.
More cases pending
Few observers expect the Constitutional Court in Karlsruhe to torpedo the ECB’s programme.
In January 2014, it had voiced concerns about OMT but then kicked the case up to the European Court of Justice in Luxembourg.
The EU’s highest court has since essentially backed OMT, arguing that while the ECB’s chief purpose is indeed price stability, it may also support EU economic policy goals.
The German court must now assess whether OMT, with the guidelines from Luxembourg, complies with the German constitution.
Even if the court gives the thumbs up, more cases are pending before it—including against the ECB decision to broaden bond purchases from only sovereign to corporate bonds.
That move is part of the ECB’s massive quantitative easing or QE stimulus program that aims to boost inflation and growth.
Critics charge that the ECB is essentially printing money and lavishing it on states and companies, leaving taxpayers with the risk of one day having to foot the bill.
The ECB has already dropped rates to near zero and saturated the eurozone with more than one trillion euros ($1.1 trillion).
Holger Schmieding of Berenberg Bank said “our best guess is that the German judges will not outlaw the OMT but place some constraints on any Bundesbank participation in a potential OMT program.”
“Would it matter? Probably not much for the time being. As the ECB is buying sovereign bonds as part of its quantitative easing program anyway, the OMT backstop is not really needed at the moment.”
Johannes Gareis of Natixis said that a negative ruling “would undermine the credibility of the OMT program”—but there “should be no impact on the ECB’s current monetary policy, in particular the QE program.”
Commerzbank said the red-robed judges might decide on a compromise, for example to follow the ECJ in its decision but not in its reasoning.
If the court regards the OMT program as essentially compatible with German law, it said, “future legal complaints against QE would presumably have less chance of success.”
Cheap cash, Brexit fears
On Wednesday the ECB launches the next round of ultra-cheap loans for banks, who are meant to pass the credit on to households and businesses.
The scheme is known as targeted longer-term refinancing operations, or TLTRO II.
And on Thursday all eyes will be on Britain’s referendum on whether to stay in the EU or leave.
Both the euro and pound have dipped in the lead-up to the vote, as analysts fear a Brexit would spark market panic. German 10-year bond saw their yields drop below zero last week in a run on safe investments.
If the ‘leave’ camp wins, the ECB would be expected to pour liquidity into banks Friday to calm markets.
The ECB last week said that, if there is a Brexit vote, it will “use all instruments at its disposal” to maintain price stability.