Bundesbank challenges ECB’s OMT in German court!!

I missed this issue completely but thanks to this voxeu article woke upto it. I mean EZ crisis is one crazy event and events around the crisis keep making you pull your hair once in a while. Germans did not like the support being given to peripheries and there were court cases against EFSF etc. But those cases were mostly by German econs (as far as I can recollect).

It now seems Bundesbank (which is a ECB member and biggest ECB shareholder) has filed a case in German court against Outright Monetary Transactions:

This week the German Constitutional Court in Karlsruhe is considering a case in which the plaintiffs oppose the Outright Monetary Transactions (OMT) programme announced last September by the ECB. The court will consider whether the ECB overstepped its mandate and thus imposed undue risks on German taxpayers. The court would be wise to dismiss the case, if it does not want to risk becoming a threat to Eurozone stability and to taxpayers in Germany and beyond.

The OMT was intended to stop a vicious spiral in spreads on sovereign bonds, which was translating into ever higher borrowing rates for the real economy in EZ countries with problems. This falls squarely within the mandate of the ECB. The ECB is supposed to ensure that monetary conditions are appropriate for the real economy to maintain price stability.

In a detailed deposition to the court, the Bundesbank discusses the intricacies of the transmission mechanism and concludes that differences in the level of interest rates across different countries of the Eurozone reflect economic fundamentals rather than a broken transmission mechanism. OMT is thus, the Bundesbank argues, outside the ECB’s mandate.

Did I read that right?

The differences between Bundesbank and ECB are well known. We all know BB always dissents on ECB policies to give any kind of stimulus to the troubled economies. But this is at a different level.

It is even more interesting to note that ECB’s German Board Member  – Jorg Asmussen will testify for OMT and  Bundesbank’s Jens Weidmann against OMT. Poor Asmuseen!

The voxeu piece argues how OMT ws like a magic to EZ’s woes and most effective policy so far. It was based on Draghi’s words that ECB will ” …to do everything it takes….and believe me it would be enough”…These were magic words indeed. Not a penny spent and spreads crashed..Obviously any tinkering with OMT will be ruin..

Eurointelligence tells me most likely Court will reject the petition..More confiusions are here

However, all this points to three broader questions.

  • One, the politics of EZ and ECB is much more interesting and complex than economics is. The internal differences between various members is huge and problematic. It is funny that people still think it can be a fiscal/political union..
  • Second, courts being dragged into matters which are just not legal. A comparison to India is immediate as we have seen courts decide on economic matters which belong to the so-called executive. People criticised this on grounds that judiciary has no role to play in executive decisions and halts economic progress. But in India’s case it  was important given how corrupt and stupid our executive has become. Here, there is a case of OMT saving EZ from absolute destruction to a much saner place now. Whereas in India’s case if judiciary did not interfere, the country’s resources were just being sold to cronies of the executive. The judiciary alerted the citizens of what was going on Indian polity.
  • Third, the crisis has stretched mandates of not just fiscal or monetary authorities but legal ones as well. Politicians have questioned the action/lack of action on constitutional grounds and this has become interesting. The roles of central banks particularly need to be debated and etched out not just in economic terms but also in legal terms. Another reason to make econ more inter-disciplinary..

Really interesting stuff…

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