February 17, 2014 5:02 pm

ECB governing council member attacks German court ruling on OMT

Austrian central bank governor Ewald Nowotny©Bloomberg

Austrian central bank governor Ewald Nowotny

A member of the European Central Bank’s governing council has attacked Germany’s highest court for intruding into European-wide monetary policy.

Ewald Nowotny, the head of the Austrian central bank, described aspects of the German constitutional court’s ruling on ECB bond buying as “dangerous”.

He told a London audience that the court had strayed into “very difficult waters” in its decision.

The judges in Karlsruhe expressed serious doubts this month about the legality of the ECB’s so-called Outright Monetary Transactions (OMT) as they referred the case to the European Court of Justice.


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Mr Nowotny said the ruling contained a “very strange, very narrow” definition of what constitutes monetary policy which departed from economic theory and the old practice of the Bundesbank, Germany’s central bank. The definition was “extremely restrictive and to some extent dangerous,” he said.

He raised concerns about the principle of a national court intervening in pan-European affairs and monetary policy, adding he took the decision in Karlsruhe “very seriously”.

Two of the eight judges dissented, saying the court should have rejected the OMT suit as inadmissible as the decision should have been left to parliament and the government.

Financial markets were unfazed by the ruling, and Mr Nowotny himself said he did not think it had direct, practical consequences for the OMT.

With fears of a break-up of the eurozone receding, the bond-buying backstop is of fading relevance, Mr Nowotny argued, saying the policy had “achieved its goal”.

The OMT was the principal product of ECB President Mario Draghi’s vow in the summer of 2012 to do whatever it took to preserve the single currency.

It has never been deployed but its existence has helped dispel fears that the eurozone faced an outright rupture.

Mr Nowotny was speaking at an event in the City of London held by the Official Monetary and Financial Institutions Forum, a think-tank.

With the ECB leaving the door ajar for an interest-rate cut as soon as next month, Mr Nowotny played down the threat of deflation and said there was a good case for the central bank to “wait and see” on rates.

However he acknowledged the possibility that the ECB’s next round of forecasts could show inflation hovering below the central bank’s 2 per cent threshold in two years’ time. He added that the central bank may keep rates at their current level, or lower, as long as inflation does not creep above 2 per cent.

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