* Bond-buying programme still alive, less likely to be used
* ECB pledge to do "whatever it takes" seen as more
important than method
* Low inflation now bigger challenge than preserving euro
By Paul Taylor
BRUSSELS, Feb 12 The European Central Bank's
chosen weapon to preserve the euro remains intact despite sharp
criticism by Germany's constitutional court, but like a nuclear
deterrent it looks increasingly unlikely to be used.
That was the consensus of policymakers and market actors
interviewed for a Reuters Euro Zone Summit this week after the
Karlsruhe court sent a challenge to the legality of the ECB's
sovereign bond-buying plan to the European Court of Justice.
ECB President Mario Draghi's announcement in July 2012 that
the bank stood ready to do "whatever it takes" to preserve the
single currency was a turning point in Europe's debt crisis.
The adoption of the Outright Monetary Transactions plan to
buy unlimited amounts of bonds of states that apply for a loan
and accept an international bailout programme calmed market
turmoil by dispelling fears of a break-up of the euro area.
In referring a complaint by eurosceptical German lawyers to
the ECJ for a preliminary ruling, the German court said last
Friday it believed the ECB had indeed exceeded its mandate and
that the scheme, which has yet to be used, probably violated an
EU treaty ban on monetary financing of governments.
Policymakers insisted the warning shot from Karlsruhe would
not prevent the plan being put into action if needed, nor
diminish its effectiveness as a deterrent.
"The status of the OMT is not changed," ECB executive board
member Benoit Coeure said. "It is ready to be used but it is
highly unlikely it would have to be used at the moment."
The shrinking of risk premia on peripheral euro zone
government debt, the return of Spain and Ireland to capital
markets and improved borrowing conditions for Portugal and Italy
mean the backstop is unlikely to be invoked.
European Economic and Monetary Affairs Commissioner Olli
Rehn said the ECB still "has its big bazooka and plenty of
ammunition for the bazooka if needed".
German Finance Minister Wolfgang Schaeuble, who defended the
OMT's legitimacy before the Karlsruhe court, said what mattered
more than details of the plan was the determination of the ECB
and of member states to stand behind the euro.
"When leaders of government on the one hand, and the central
bank on the other, say they will do what is necessary, then
financial markets need not worry," he told Reuters.
If the OMT became problematic, the ECB would find something
else. The very low level of inflation is now a more pressing
problem for the euro zone anyway, and the central bank has a
range of tools it could use to nudge prices up if required.
LAWYERS, ECONOMISTS DOUBT
However, several legal experts and economists argue that the
OMT has been seriously weakened and is now less likely than ever
to be used.
While the case remains sub judice, German lawmakers might
well refuse to approve a loan from the euro zone's rescue fund
that could trigger ECB bond-buying. And Germany's Bundesbank,
which opposed the plan from the outset, could refrain from
buying its share of bonds if it were activated.
Since either of those eventualities would trigger a crisis
of confidence in the euro zone, policymakers will be eager to
avoid putting the matter to the test.
"It will be very hard for the OMT to come out of this
unchanged. I can basically think of no scenario where this can
happen," said Clemens Fuest, head of Germany's influential ZEW
economic research institute.
If the ECB were to buy bonds now, "people will say 'you are
circumventing the OMT discussion'," he said.
European Commission President Jose Manuel Barroso said it
was a historic precedent for the august German court to refer a
case to the ECJ in Luxembourg for the first time, recognising
the responsibility of the European court to uphold EU treaties.
At the height of the crisis in 2011-12, he recalled, world
leaders and financial market players who called him cared less
about details of euro zone policies than about getting a clear
assurance that the EU would stand behind its currency.
Draghi's statement was crucial, along with EU leaders'
commitment to fiscal discipline and their agreement to underpin
monetary union with a banking union with a single supervisor and
resolution system for winding down failed banks.
The calm financial market reaction to the Karlsruhe decision
suggests investors think the ECB's undeclared role as the euro
zone's lender of last resort has not been undermined.
The OMT may have become somewhat more virtual, but like a
nuclear deterrent, it remains effective because a potential
adversary cannot be certain that it could not be used.
When the idea was floated last year that the ECB might buy
bonds to support Ireland's exit from its bailout programme if
Dublin sought a precautionary credit line, a senior EU official
privately urged the Irish not to ask a question to which they
might not like the response.
In the end, Ireland returned to capital markets without
support from the euro zone's rescue fund or the ECB.
The question of a precautionary credit line may arise again
for Portugal, which is due to exit in May, but with any risk of
a euro break-up dispelled for the foreseeable future, no one is
expecting the ECB to step in.
German legal experts and economists continue to chip away at
the OMT. A working paper for the ifo economic institute is the
latest to challenge whether the plan would be effective in
restoring the transmission of ECB monetary policy, its supposed
So while the ECB's wonder weapon is likely to remain
sheathed and under fire, it has already achieved its main
purpose, and the euro zone has moved on.