ECB official defends crisis measures in court

ECB official: bond purchase plan aims to carry out monetary policy, not help governments

Associated Press
ECB official defends crisis measures in court
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The Second Senate of the German Constitutional Court, from left: Peter Huber, chairman Andreas Vosskuhle and Gertrude Luebbe-Wolff, open a session at the German Constitutional Court in Karlsruhe, Germany, Wednesday June 12, 2013. A top European Central Bank official has defended the bank's key crisis backstop in a second day of hearings before Germany's Federal Constitutional Court. Joerg Asmussen told the eight judges that the ECB's plan to purchase government bonds was only aimed at making sure the bank's monetary policy is effective, not at rescuing governments in the 17-country eurozone. The ECB is prohibited by treaty from financing governments. But Asmussen insisted Wednesday that the ECB had not exceeded its powers with the bond purchases program, even to spare a country from going bankrupt. (AP Photo/dpa, Uli Deck)

KARLSRUHE, Germany (AP) -- A top European Central Bank official rejected accusations that the bank had exceeded its powers while fighting the financial crisis, telling Germany's supreme court its bond-buying program is only meant to ensure its monetary policy works.

The Federal Constitutional Court was holding a second day of hearings to weigh allegations that the ECB's plan to purchase government bonds amounted to financing for governments, which is illegal for the central bank. Critics also say it exposes taxpayers to potential losses and threatens the ECB's independence.

Joerg Asmussen told the eight judges that the program is not meant to rescue governments in the 17-country eurozone but only to help the ECB conduct its monetary policy. It is tasked with keeping inflation close to but below 2 percent.

The bond purchase plan, agreed Sept. 6, is an offer by the ECB to buy potentially unlimited amounts of bonds of a government in trouble, provided they apply for that help and agree to a program of reforms in return. The program - which no government has tapped so far - helped lower bond market interest rates, which in troubled countries like Spain were far higher than in financially stronger ones like Germany.

Experts say the program — dubbed Outright Monetary Transactions, or OMT — was crucial in easing Europe's crisis over too much debt by giving leaders time to fix their finances. It followed ECB President Mario Draghi's vow to do "whatever it takes" to save the euro.

Asmussen, a former German deputy finance minister who now serves on the bank's executive board, said the program helped the ECB's monetary policy function properly. That's because the high borrowing rates in financially troubled countries were preventing the ECB's low interest rates from helping the economy there. Such high borrowing rates were blocking the transmission of the ECB's policies throughout the eurozone.

"The goal of OMT is to remove the disturbed transmission mechanism," Asmussen told the judges. "It is not the goal to keep states from insolvency."

After court finished for the day, Asmussen said it was important that the ECB had been able to underline to financial markets that the program remained in place. Some analysts have expressed worry that German legal questioning of the OMT program could undermine its calming effect on markets.

Asmussen highlighted that the program is undiminished in its scope — the ECB has the right to buy whatever sum of bonds it deems necessary.

"Mario Draghi's statement, 'whatever it takes,' remains valid," Asmussen told reporters.

The court also heard from OMT opponent Jens Weidmann, the head of Germany's Bundesbank national central bank. He reiterated his position that the purchases would spread risk of losses to all eurozone taxpayers.

The plaintiffs include a backbench lawmaker with Chancellor Angela Merkel's conservative bloc, a group of professors, a citizen's group and a left-wing opposition party.

The court is also hearing arguments regarding Germany's participation in the European Stability Mechanism, a bailout fund that can rescue troubled states with loans. In a preliminary ruling last year, the court indicated most aspects of Germany's backing for the ESM were in accord with the country's constitution.

The court could in theory bar Germany and its institutions from participating in the rescue measures, a step which could call Germany's role in the euro currency union into question.

Analysts say that is highly unlikely, but the court could add conditions to German participation that could add to uncertainty about its credibility in calming financial markets. Or the judges could refer issues to the European Court of Justice. The ECB, as an EU institution, is not being sued directly in the case.

A decision by the court is not expected for months.

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