Germany holds off on condemning outright monetary transaction policy

The policy credited with halting the euro crisis — outright monetary transactions — is likely to exceed the European Central Bank’s remit and violate German law according to the German constitutional court.

The antipathy of many German banking and judicial figures towards the programme of unlimited buying of government bonds on the secondary market by the ECB is cited as one of the reasons that led the Government not to apply for a precautionary credit line when exiting the bailout.

While the announcement of outright monetary transactions succeeded in calming markets when nothing else did, it has never been used, and it is understood the necessary legal text has never been drawn up.

Yesterday’s decision of the German court to pass the issue to the European Court of Justice for clarification will allow outright monetary transactions to remain an option and many pundits believe that the European Court will be more supportive of the ECB.

However, when the issue returns to the German court, it could rule the transactions incompatible with the German constitution and insist on a limited version of the programme.

If the transactions were limited and placed under certain conditions, it may not contravene the ban on the ECB funding governments, the statement said. However, the suggested limits could exclude a country like Ireland.

In Dublin yesterday, ECB executive board member Yves Mersch said the outright monetary transactions programme was, “in our opinion, fully within our mandate”, adding that it was now up to the European Court of Justice to assess.

The court may fast-track its consideration of the case, as it did with the challenge to the ESM referred from the Irish courts that took just over three months. The issue would then return to the German court.

In August/September 2012, ECB President Mario Draghi said it would be available to countries exiting bailouts that had already raised 10-year funds on the open market but that conditions would be attached.

His statement that the ECB would do “whatever was necessary” to save the euro, including outright monetary transactions, calmed the crisis.

The German court is due to rule on the legality of the European Stability Mechanism on March 18.


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