April 15, 2021

German Court to Weigh Bond Buying by E.C.B.

On one side is Jens Weidmann, the president of the Bundesbank, the German central bank. He plans to argue that the European Central Bank acted illegally when it promised last year to buy unlimited amounts of government bonds if needed to help prevent Italy and Spain from having to leave the euro.

The other, Jörg Asmussen, a member of the executive board of the European Central Bank, will defend the central bank’s actions, which have significantly eased fears that the euro zone will disintegrate.

The two men — who studied under the same economics professor at the University of Bonn, Manfred J. M. Neumann — are among the most prominent expert witnesses scheduled to appear before the Federal Constitutional Court in Karlsruhe on Tuesday and Wednesday. Their testimony is already being portrayed as a duel between those who contend that Europe’s central bank has a duty to do whatever is necessary to save the currency union, and those who argue that the central bank has merely rewarded the feckless behavior of countries like Italy and Greece.

The court is considering lawsuits brought by German citizens in response to central bank actions to contain the euro zone crisis. While no national court in Europe has the power to tell the central bank what to do, the German Constitutional Court could place limits on the country’s participation in anticrisis measures. One former high court justice, Udo Di Fabio, even argued in a recent paper that Germany would have to withdraw from the currency union if central bank actions violated national laws — a move that, if it reached that point, would probably destroy the euro.

Most analysts do not expect such a drastic result when the Constitutional Court issues a ruling this year. But the legal challenges, and the media attention they have received, may already be restraining central bank action.

The bank “pays a lot of attention not only to the court but also to public opinion,” said Thomas Harjes, an economist at Barclays in Frankfurt. “If they feel they are losing support in Germany, their credibility would be damaged.”

Much of the intellectual foundation for the legal challenges comes from the academic work of people like Mr. Neumann, the University of Bonn professor. His views, including a fixation on inflation and an almost moralistic belief that countries must live with the consequences of their past mistakes, have had an obvious influence on Mr. Weidmann, the Bundesbank president. Mr. Weidmann worked as a research assistant to Mr. Neumann while earning his doctorate in the 1990s.

“The position that he represents is also the position that I would take,” Mr. Neumann said of his protégé on Monday.

As for Mr. Asmussen, his other former pupil, Mr. Neumann was more restrained in his praise: “He has to formulate the majority opinion of the E.C.B. That is different from the German position.”

Mr. Weidmann has made no secret of his opposition to bond buying, even in theory. “Such burden-sharing measures should lie only with elected parliaments, not independent central banks,” he told an audience in Paris last month.

To his critics, Mr. Weidmann is seen as someone who insists on a narrow interpretation of European Union treaties written decades ago, when no one could imagine such a persistent crisis. While the threat of a euro breakup has receded, the Continent has been stuck in recession for a year and a half. But Mr. Weidmann also speaks for millions of Germans who are suspicious of European institutions and fearful that the country’s taxpayers will ultimately pay the bill.

So far the debate is largely theoretical. The European Central Bank has not bought any government bonds since it announced a willingness to do so last autumn. The mere threat of action was enough to calm bond markets and lower borrowing costs for Italy and Spain.

Article source: http://www.nytimes.com/2013/06/11/business/global/german-court-to-weigh-bond-buying-by-ecb.html?partner=rss&emc=rss