8th Feb 2023

ECB defends "whatever it takes" scheme in EU court

  • The scheme, which helped saved the euro, is too political for the ECB, the German plaintiffs say (Photo: Cedric Puisney)

ECB lawyers defended the bond-buying programme at the heart of Mario Draghi's promise to do "whatever it takes" to protect the eurozone at the EU’s top court in Luxembourg on Tuesday (14 October).

The case was brought by German plaintiffs, including Peter Gauweiler - an MP from the Christian Social Union, a junior member of chancellor Angela Merkel’s coalition - several academics, and the opposition Die Linke party.

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The European Central Bank's (ECB) lawyer, Hans-George Kammann, told judges the programme had been vital to maintaining price stability across the bloc.

"Cross border interbank lending had virtually dried up," he said.

He added that interest rate cuts had failed to reach all eurozone countries, who faced "excessive interest rate premia because the markets thought that the eurozone could break up”.

The programme, known as Outright Monetary Transactions, was launched in September 2012 at the height of the eurozone crisis.

ECB president Draghi at the time told reporters that the bank would do "whatever it takes" to save the single currency - his three most famous words.

It allows the Frankfurt-based bank to buy potentially unlimited amounts of government bonds, effectively making it a bank of last resort. However, the ECB insists that eligibility for the programme depends on countries making structural reforms to their economies.

Yields on Spanish and Italian 10-year bonds, which were close to the 7 percent red line on debt sustainablity, quickly fell, easing fears the countries could need EU bailouts.

It is widely credited as the most significant step taken by EU institutions to save the single currency, despite the fact that the ECB is yet to buy a single bond under the scheme.

But critics, which include Bundesbank president Jens Wiedmann, say that the programme goes beyond the ECB's mandate of maintaining price stability across the 18-country eurozone.

They also say that knowing the ECB will buy their debt could make EU chancelleries less prudent.

The plaintiffs had filed their case to the German Constitutional court in Karlsruhe, which in February referred the case to the European Court of Justice.

In court, Gauweiler's lawyer, Dietrich Murswiek, described the ECB scheme as an “egregious extension of [the bank’s] powers” which was designed to "avert the insolvency of member states".

Speaking with EUobserver, Fabio De Masi, Die Linke’s MEP in charge of economic affairs, noted that the programme had been "very effective” in calming financial markets.

But he said it “failed on the real economy since it is attached to austerity and lacks democratic scrunity".

He added that the bank is "technically conducting fiscal policy but without democratic scrutiny … if they want to do politics they have to be accountable".

The ECJ ruling is expected early next year, but few analysts expect it to order the ECB to abandon the programme.

"The final verdict will get a lot of attention, although I wouldn't expect any shocking verdict," ING economist Carsten Brzeski told this website.

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