ECB defends bond-buying scheme in top German court

The European Central Bank defended in Germany's highest court Tuesday a controversial bond purchase scheme that is credited with pulling back the eurozone from the brink of collapse last year.

The Constitutional Court has been asked by critics of the ECB's "Outright Monetary Transactions" to examine whether the scheme is in line with German law or whether it breaches the central bank's mandate.

The plaintiffs, a diverse group of German politicians, lawyers and citizens, argue the ECB is creating risks for German taxpayers that their elected representatives cannot control.

But the ECB insists that the OMT -- which has proven to be the most effective weapon against the crisis so far and effectively defused fears last year of an imminent break-up of the euro -- is in line with its mandate to safeguard price stability.

"The announcement of OMT was and is the necessary and appropriate step to eliminate the disruption in the transmission of monetary policy caused by concerns that there would be an unwanted break-up of the euro," the ECB's witness, executive board member Joerg Asmussen, told the court.

"The risks of not acting would have been greater," he said.

"I am firmly convinced that introducing the OMT programme was the right thing to do to ensure price stability in the euro area. After all, a currency can only be stable if its continued existence is not in doubt," Asmussen said.

He said the ECB and its decision-makers were conscious of the limits of its monetary policy mandate.

"It is not allowed to, is not able to and does not want to replace the actions of democratically elected governments," Asmussen insisted.

"Quite the opposite. The OMT programme is therefore aimed at protecting the market mechanism so as to urge the member states to make the necessary reforms," he argued.

While the Constitutional Court is not expected to make a ruling before the autumn, it set aside two days this week to hear expert witnesses on both sides, including Asmussen, Bundesbank President Jens Weidmann, one of the most vocal critics of the scheme, and German Finance Minister Wolfgang Schaeuble.

Schaeuble insisted that the German government, which faces reelection in September, believed the ECB was acting within its mandate.

It was "up to the ECB to decide, within its wide remit, which are the correct monetary policy measures to take," the minister insisted.

The German government "sees no sign that the measures breach the ECB's mandate," which was to safeguard price stability, he insisted.

Furthermore, no bond purchases had yet been made under the OMT scheme "and so it can only be judged when a corresponding decision has been made," the finance minister argued.

Ever since the ECB unveiled the OMT to buy up the sovereign debt of the euro area's most debt-wracked members last August, fears of a break-up of the single currency have indeed receded.

Europe's storm-battered financial markets have enjoyed a period of relative calm, without a single OMT ever being carried out.

Already last year, critics saw complaints against the eurozone's EFSF and ESM bailout funds similarly thrown out by the Constitutional Court.

Unlike the EFSF and the ESM which were set up by governments, the OMT programme is the brainchild of the ECB itself.

And the bank has laid down very strict conditions if a country wants to be eligible for support from the OMT scheme. Furthermore, the ECB has said it will decide on a case-by-case basis whether to grant a country access.

ECB executive board member Yves Mersch said that "economically, the OMT has proven to be highly effective ... and efficient, with not a single cent being spent so far."

Speaking to the daily Boersen-Zeitung in an interview to published on Wednesday, Mersch, who is also Luxembourg's central bank chief, said that while he did not want to anticipate the court's decision, he was confident it would approve the programme.