Europe’s top court on Tuesday heard a challenge to the European Central Bank’s landmark bond-buying scheme to contain the eurozone crisis in a case underscoring deep concerns in Germany over ECB clout.
The case comes more than two years after the ECB backed a scheme to buy government bonds, called Outright Monetary Transactions (OMT). Although the plan has since been all-but moth-balled, the ruling, due in the middle of next year, could have wide significance.
If successful, the action by a group of Germans would encourage other challenges to the central bank. That in turn could hamper the ECB’s freedom to act, such as any move towards quantitative easing or ‘printing money’ by buying state bonds across the eurozone.
The challengers argue that the ECB’s plan to buy the bonds of troubled countries would have resulted in losses for the ECB and eurozone members such as Germany.
“What the ECB is asking for of the European Court of Justice is to legally sanction a monstrous extension of its remit,” said Dietrich Murswiek, the lawyer representing Peter Gauweiler, a Bavarian conservative lawmaker who is one of the plaintiffs.
The ECB says it acted within its mandate and in an emergency situation.
The plaintiffs’ lawyers argued on Tuesday that the ECB had overstepped the mark with its pledge to buy bonds of countries in a crisis, drifting beyond its ‘monetary policy’ role of setting the cost of borrowing to interfere with management of the economy.
The action by more than 35,000 plaintiffs is highly politically charged and driven by a desire to curb the power of the ECB.
“The European Central Bank acts like the Central Committee,” Gauweiler told Reuters, in a reference to Soviet administration. “The Central Committee has moved to Frankfurt from Moscow.”
He said: “They believe that they can do what they want with the citizens’ money. In parliamentary democracies, citizens decide about taxpayer money.”
Gregor Gysi, a lawyer who leads the German Left party’s parliamentary group and is one of the plaintiffs, drew a parallel between the ECB’s bond-buying plan and its more recent scheme to buy rebundled debt known as asset backed securities.
“It doesn’t act like a bank,” Gysi told journalists before making his statement to court.
“Now it wants to buy 1 trillion euros of junk paper. It will be the biggest bank in the history of the world,” he said.
“They have power. Power must be controlled and limited.”
A judgement in the case, which was referred to European judges by Germany’s constitutional court, is expected by the middle of next year.
The German court had said there was good reason to think the plan exceeded the ECB’s mandate and violated a ban on it funding governments.
The Luxembourg court’s advocate general will give his view as to whether the ECB broke European law as soon as January, showing how the court is likely to decide.
“This would severely reduce the scope of the ECB to act,” said Guntram Wolff of think tank Bruegel. “If there was a severe doubt about the ability of the ECB to act if it wanted to, it could shatter market confidence.”
In court on Tuesday, the ECB defended its action, arguing that it had acted in an emergency, without breaking the rules.
The ECB’s OMT program, announced by President Mario Draghi in September 2012 at the height of the sovereign debt crisis, is widely credited with pulling the eurozone back from the brink.
Its power lay in the promise of potentially unlimited sovereign bond purchases – a prospect that calmed fears about the currency collapsing and backed up Draghi’s vow to do “whatever it takes” to save it.
“The situation had worsened dramatically,” Hans-Georg Kamann, its lawyer, told judges, reflecting on the mood at the time.
“The feared scenario of collapse threatened to become an uncontrollable self-fulfilling prophesy,” he said, arguing that the ECB’s usual levers of monetary policy had no longer worked.
“Compare the ECB with the fire brigade. A house is burning. Other houses could catch fire … It puts out the fire in the house that’s burning.” [Reuters]