The ECB has rolled out several waves of monetary stimulus in recent months, boosting its bond-purchase program to around EUR1.8 trillion and cutting interest rates further below zero in an effort to support the region’s modest recovery.
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Although never used, the ECB’s controversial Outright Monetary Program in principle allowed the bank to stop eurozone governments from teetering on the edge of bankruptcy by buying sovereign bonds in whatever quantities needed to keep those nations financially afloat.
Andreas Vosskuhle, president of the Constitutional Court, said that the Outright Monetary Transactions (OMT) scheme – which has never been activated, but allows the European Central Bank to make unlimited purchases in secondary, sovereign bond markets – does not violate German law.
The decision comes as investors are braced for the fallout from Thursday’s British referendum on whether to remain in the EU.
It’s worth noting that no such transactions have ever been made under the OMT program as the sheer announcement of it was enough to achieve the desired impact.
More likely, the court will rule that OMT is legal only under certain conditions, lawyers and analysts said.
Many analysts still expect the European Central Bank to boost its stimulus again before the end of the year to close the gap between its inflation forecasts and its target of just below 2%.
Holger Schmieding of Berenberg Bank said “our best guess is that the German judges will not outlaw the OMT but place some constraints on any Bundesbank participation in a potential OMT programme”.
The ECB last week said that, if there is a Brexit vote, it will “use all instruments at its disposal” to maintain price stability.
The Constitutional Court ruled that if conditions previously laid out by the European Court of Justice are met, OMT “does not “manifestly” exceed the competences attributed to the ECB” and “does not present a constitutionally relevant threat to the Bundestag’s right to decide on the budget”.
The program came into being as a result of ECB President Mario Draghi’s remarks back in July 2016 when he said that within the bank’s mandate, the ECB would “be ready to do whatever it takes” to preserve the euro.
Commerzbank said the red-robed judges might decide on a compromise, for example to follow the ECJ in its decision but not in its reasoning.
That “could be an end to European integration”, because it would mean the bloc’s other national constitutional courts have the power to overrule the European Union, Prof.
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If nervous investors start to push up spreads on bond yields, the European Central Bank could find itself without a tool tailor-made for dealing with it, according to Anatoli Annenkov, senior economist at Societe Generale SA in London.
