EU Economy
Germany's Schäuble opposes ECB's OMT bond-buying program
By Michael Hennigan, Finfacts founder and editor
May 23, 2014 - 7:29 AM

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Wolfgang Schäuble, German finance minister, at a press conference in Berlin May 22, 2014.

Wolfgang Schäuble, German finance minister, on Wednesday expressed opposition to future ECB (European Central Bank) sovereign bond-buying that is part of the OMT program.

The OMT (Outright Monetary Transactions) bond-buying scheme was announced in September 2012 to give effect to the famous July 2012 commitment in London by Mario Draghi, ECB president, to do “whatever it takes” to save the euro.

The July 2012 commitment is seen as having been a crucial move in saving the euro and bond yields of peripheral countries have plunged since, without having to launch OMT.

The ECB in effect promised to make unlimited purchases of the sovereign debt of governments in trouble.

However, last February the German Constitutional Court ruled that OMT was beyond the central bank's mandate.

While the institution to decide whether a European body is abiding by European law is in Luxembourg at the European Court of Justice (ECJ), the court in Karlsruhe insists on its right to examine whether the acts of a European institution are infringing the German constitution.

The German court ruled that OMT was a form of “monetary financing” of governments, outlawed under European treaties. However, it referred crucial points in the case to the ECJ.

On Thursday Prof  Hans-Werner Sinn, president of the Ifo economics institute, a strident critic of bond-buying and the banking union - -  according to the Financial Times in 2012, Wolfgang Schäuble privately refers to Prof Sinn – whose name means “sense” – as Prof Unsinn, or “Nonsense” - -  welcomed the fact that Schäuble wants to block bond purchases by the ECB via the OMT program. “This is a reaction to the German Constitutional Court’s announcement that with the OMT the ECB is overstepping its mandate and misusing its power. The German federal government had not publicly responded to the Constitutional Court’s statement of 7 February prior to Schäuble’s comments. This is one of the few indirect indications that the government is taking the Court’s statement seriously,” said Sinn in Munich. “This means that it seems unlikely that the OMT can ever be used to protect the buyers of over-indebted countries’ government bonds from financial losses.”

On Wednesday the news agency Bloomberg reported that Schäuble had explained at an event in Bielefeld that, as far as decisions over OMT bond purchases are concerned, the ECB “cannot make these decisions because it has bound them to conditions that are beyond its control”. Schäuble said that these conditions are decided by the ESM (European Stability Mechanism bailout fund). The ESM is controlled by governments.

“ESM decisions are subject to a unanimous vote and we will not approve of such a programme as announced by the ECB,” explained Schäuble.


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