Germany and Europe in 2014: A Conversation With Christoph Schmidt

On February 7, the German Constitutional Court decided it would refer the complaint (backed with 35,000 plaintiffs) against the European Central Bank's bond-buying mechanism, OMT, to the European Court of Justice. The prospect of the ECB's famous Outright Monetary Transactions mechanism -- enabling the central bank to purchase government debt unlimitedly -- seems to be definitely less endangered in Luxembourg than in Karlsruhe, where the German Constitutional Court is seated. The European Court of Justice has so far had the reputation of supporting European actions, especially those undertaken in crisis times. However, the German court clearly stated that it believes OMT oversteps the ECB's mandate, violates the German constitution and the Bundestag's sovereignty.

So far, the German Bundesbank -- and its chairman Jens Weidmann in particular -- was highly critical in public of OMT, even though already before the OMT announcement (though so far without implementation) purchases of lower-grade peripheral government bonds were undertaken by national central banks (with the Bundesbank making 25 percent of purchases); furthermore, OMT would be dancing on the edge of the monetary financing, banned by the Maastricht treaty, thus compromising the ECB's independence and the principle of a strongly independent central bank which is most vehemently defended by Germany. In all of these grievances, the Bundesbank seemed to reflect views of the German experts. At the sidelines of the German Conference at Harvard, I met with Christoph M. Schmidt of German Council of Economic Experts to discuss developments in Germany and Europe-wide.

Starting with the most heated topic of the moment, Schmidt's belief is that, although OMT has worked well so far, it is stretching the mandate of ECB too far, especially with the limitlessness of the transactions. He would rather see OMT's volume conditioned, paying attention that the provision of liquidity is still working. According to Schmidt, both the German government and the GCEE believe that the transmission channel of monetary policy in the Euro area can be made functioning without two OMT's most controversial elements: limitless volume and conditionality.

On the other hand, Schmidt pointed out that the German government, just as all other sovereigns in EMU area, also knows that only the 2012 ECB intervention with the OMT helped euro area survive. In that sense, they would not be openly critical about it as they are the biggest integration factor in the euro area. Schmidt holds that the government, although being critical about entanglement of fiscal and monetary policy, still recognizes the fact that, as Schmidt put it, "the crisis manager has effectively stepped in" during the crisis' peak.

The ECJ itself can take a look at OMT issue in a relaxed state of mind. Schmidt believes that if OMT proves to be a breach of EU treaties in its specific form that would not automatically mean that ECB cannot always intervene by buying nonspecifically a weighted average of bonds issued by Euro area sovereigns, since it is independent. "Generally, if the ECB decides that monetary policy is best followed by buying portfolios of government bonds on the secondary market, it can always pursue that policy," Schmidt added. In addition to that, since it is willing to save the euro by intervening, even if it is not concretely via OMT, it can still effectively play that role. Therefore, although it is hard to make an accurate forecast, the ECJ is likely to warn ECB on certain aspects of OMT and maybe rule out limitless purchases, but still legitimize OMT.

OMT is not the only issue German economists are quarreling with their colleagues abroad -- they also seem to be at odds about German government accruing surpluses. With US Treasury and some European voices calling for more domestic consumption, Schmidt believes US criticism is somewhat shallow as it does not take into account major demographic and labor market changes ahead of Germany and the fact that market outcomes are not set by the government.

"Some countries believe Germany should solve their own competitiveness' problems," Schmidt comments, "introducing the minimum wage in whole of Germany would be shooting ourselves in the foot." He also underlined the GCEE's view of German growth and competitiveness helping the entire EU rather than damaging it. "With Germany being the fastest in the euro area, other EMU members might not feel comfortable, but we're racing together against other areas in the world," he said.