Reuters: Regulatory News: ECB rebuffs Bundesbank call for new limits on its mandate

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ECB rebuffs Bundesbank call for new limits on its mandate Jun 12th 2013, 14:59 Wed Jun 12, 2013 10:59am EDT * German court considers ECB bond-buy scheme that calmed crisis * ECB says its mandate does not need changing * Bundesbank chief say limits would ensure stability, credibility By Annika Breidthardt and Ilona Wissenbach KARLSRUHE, Germany, June 12 (Reuters) - The European Central Bank defended itself in a German court on Wednesday against suggestions that its role should be more limited, clashing with Germany's Bundesbank over its main tool in calming the euro crisis. ECB executive board member Joerg Asmussen and Bundesbank chief Jens Weidmann disagreed at a Constitutional Court hearing into the ECB's bond-buying plan on whether ECB powers should be redefined - with Asmussen warning it would open a Pandora's Box. When court president Andreas Vosskuhle asked the Bundesbank president if it would be a "sensible strategy" to regulate the ECB's mandate via German law, Weidmann said this was why he opposed the ECB's Outright Monetary Transactions (OMT) scheme, the programme to buy bonds in certain circumstances of struggling euro zone members. "I am concerned that, in the end, long-term problems could be the result," he said, citing risks to stability. Sources close to the German government, which endorses the ECB's most effective response to the euro crisis, voiced concern that the court might try to get the ECB's mandate updated and demand that it be renegotiated with Berlin's partners. More than 35,000 Germans have filed complaints that the ECB plan to buy up the debt of stricken euro zone member states violates their constitution. Germany's conservative chancellor, Angela Merkel, has vigorously defended the ECB scheme. ECB chief Mario Draghi announced the plan last year to fend off speculation the 17-member euro zone could collapse under the weight of the debt crisis. He has called it "probably the most successful monetary policy measure undertaken in recent time". The court case, which is not likely to produce a verdict until after Germany's election in September, set the stage for a rare public dispute between European Union central bankers. The Bundesbank president sits on the ECB's governing council. Weidmann and Asmussen studied in Bonn and worked together on Berlin's response to the financial crisis in their last jobs as advisers to Merkel's government. They sat together and chatted on both days of the hearing, despite defending opposite corners. Asmussen, speaking before Weidmann, was asked if the ECB would be too limited by a legal definition of what is allowed under its bond-buying plan. He observed dryly that only Germans were concerned with this. The mandate of the ECB, set up in 1998, was largely modelled on the Bundesbank. "But if you want to discuss Article 123 of the EU Treaty (which prohibits state financing via monetary policy), then there will be a broad discussion what else could be changed, even in terms of the mandate of the central bank," he warned. PRINTING MONEY? Critics of the OMT argue that it violates the ECB's mandate of achieving price stability and amounts to illegal back-door financing of struggling euro zone governments. The court cannot revoke the ECB scheme but, in considering whether it violates the German parliament's right to control the budget, it could block German participation or challenge certain aspects of the programme, such as its "unlimited" nature. This could wreck the effectiveness of the OMT, which has worked largely by giving investors the confidence to buy bonds, safe in the knowledge the ECB would intervene on the secondary market if any government were at serious risk of defaulting. In earlier rulings the court has approved euro zone bailout schemes while insisting that the Bundestag, or lower house of parliament, be consulted more fully. The euro zone crisis has subsided significantly since Draghi first sent signals about the scheme, promising in a speech in London last July to do "whatever it takes" to save the euro. Asmussen's fellow ECB executive board member Benoit Coeure warned at a conference in Berlin that the ECB's independence was being put "under strain", adding: "We don't have to change the mandate, we don't have to change the objectives." Weidmann fears that the bond-buying programme removes part of the incentive for euro zone states to reform their economies and could undermine the credibility of the ECB. He has denounced it as tantamount to printing money - a taboo in Germany, where inflation fears still run deep nearly a century after runaway prices under the Weimar Republic devastated the economy, which helped the Nazis rise to power. Germany's best-known economist Hans-Werner Sinn, head of the Ifo Institute in Munich and a long-standing critic of bailouts for countries like Greece, questioned Asmussen's attempt to convince the court the debt-buying plan was limited in scope. Asmussen said that while making the OMT "unlimited" was crucial for convincing markets of the ECB's determination to save the euro, it was "effectively limited" by the fact that it is restricted to bonds with a short maturity. Analysts say this refers to about 524 billion euros ($695 billion) of outstanding short-term debt of Italy, Spain, Portugal and Ireland. But Sinn, also giving expert evidence before the eight judges in Karlsruhe, argued that as all longer bonds would at some point have maturities of under four years, it could amount to up to 2 trillion euros for current crisis countries. One of the questions before the court is whether it has jurisdiction over the ECB, which is bound by EU law. It could defer the case to the European Court of Justice in Luxembourg, which legal experts believe is much more likely to give a green light to the OMT. Link this Share this Digg this Email Reprints

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