ECB Under Fire as Critics of Bond-Buying Plan Reach EU Court
(Bloomberg) -- Critics of the European Central Bank’s quantitative-easing program accused the Frankfurt-based institution of overstepping its powers with “opaque and omnipotent activities” as their fight against the controversial policy reached the European Union’s highest court.
At a packed hearing, the key question the EU Court of Justice must weigh is whether the ECB’s quantitative-easing policy falls within the bank’s mandates defined in the bloc’s law.
Germany’s Federal Constitutional Court last year sought the EU judges’ guidance in a series of challenges to the ECB measure by opponents who, on Tuesday, told the Luxembourg-based court that the tool conflicts with the prohibition of so-called monetary-policy financing.
“The ECB has become a big play-maker in the distortion of competition on the capital markets for sovereign bonds and corporate bonds and has in this way suspended the system of undistorted competition which is mandated in the treaties,” Markus Kerber, a lawyer for some of the claimants, told a 15-judge panel.
The case is reminiscent of a previous challenge when German judges asked the EU’s top court for guidance on a challenge to the ECB’s Outright Monetary Transactions program. The bloc’s court in a binding ruling later cleared the program with minor strings attached and the German tribunal reluctantly followed that direction in its final judgment. Most of the plaintiffs in the QE cases were in the group that sued against the OMT.
Hans-Detlef Horn, a lawyer for another group which consists of five members of the European Parliament, told the EU court that the program “clashes with the prohibition of monetary financing because it puts market participants in a position to buy without risk and de facto as intermediaries of the euro system on the primary market” and “removes the incentive of issuing states to pursue a sound fiscal policy.”
The ECB started the QE program to stimulate the slumping euro-area economy after it had lowered interest rates to close to zero. It’s already announced it will stop making net asset purchases at the end of this year.
The German Karlsruhe-based tribunal said in its own decision a year ago that there are “grave reasons to hold that the motions underlying the bond-buying program violate the ban on monetary financing of states and overstep the mandate of the European Central Bank and thus transgress the powers of the member states.”
At odds with its own national court, the German government’s view is that the contested ECB decision and its implementing measures “are currently in any case, still in line with the Treaty,” representative Ulrich Haede, a law professor, told the EU judges.
“With regard to the overall extremely comprehensive communication by the ECB, my government takes the view that the ECB has met its obligation to provide adequate reasoning,” he said.
The ECB, with the backing of the European Commission, has defended its program, saying it’s fully within its mandate.
The central bank likened its role to that of lock keeper, where, like for water flowing down a river, it regulates the supply of money for the economy in the euro area.
“Since the beginning of the financial crisis in 2008 the ECB has pulled back the weirs to act in the interest of all” and “now we are seeing how these measures have had the desired effect,” Karen Kaiser, a lawyer for the ECB, said in court. “The economy is growing, unemployment is sinking” and “the floods that some had feared, didn’t come.”
The euro area’s central bank began large-scale asset purchases in March 2015 -- more than six years after the U.S. Federal Reserve started its first program.
Germany’s Bundesbank was outspoken against the measure even before it began, arguing that it reduces incentives for governments to make their economies more competitive.
“Experience shows that independent central banks are best at ensuring price stability and therefore primary law provides for far-reaching independence of the euro system in the performance of its tasks,” Ulrich Soltesz, a lawyer representing the Bundesbank, told the EU court. “Bond purchases by the euro system should remain reserved to exceptional situations and subject to clear restrictions.”
An adviser to the EU court said he would issue a non-binding opinion in the case on Oct. 5. A final ruling could come a few months later.
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