ECB’s Bond Plan Undergoes Elephant Test

The elephant in the room is actually being talked about. Or the elephant in the china shop, if you want to take the German metaphor invoked today by one jurist at the Constitutional Court in Karlsruhe, where the country’s top judges are deliberating over whether or not the European Central Bank might be breaking the law with its OMT bond plan. If the ECB’s OMT is the elephant, the china shop is the realm of broken rules where it ought not to tread.

While the court will take months to deliberate on whether it can rule on this question, over two days the ECB and the Bundesbank have been in the same room debating whether or not they’re allowed to do what they’ve already done in promising that the ECB will do “whatever it takes” to preserve the euro.

One might expect it to be tense. It’s not. ECB board member Joerg Asmussen and Bundesbank President Jens Weidmann are lunching together and are as chummy as one would expect old colleagues to be. Even though Weidmann voted against the OMT in September last year, his evidence to the court on June 11 and 12 has been reserved. At his bluntest, he wondered aloud if the program is covered by the central bank’s mandate. Germany’s top court doesn’t have a reputation for scuppering European bailouts, rather for imposing conditions.

In the case of the OMT, even Weidmann agrees that if you impose too many more conditions (governments already have to sign up to adjustment programs before the ECB will even consider buying their bonds) the power of the program to ease market fears will be subdued. In his way, Weidmann and the court might be finding a way to keep the beast without breaking too much porcelain.

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