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German court decision 'real threat' to ECB's safety net

Thursday, 27 Feb 2014 | 1:44 AM ET
Bundesbank won't participate in OMT: Sinn
The Bundesbank is unlikely to participate in the ECB's OMT program even if the European Justice Court deems it legal, argues Hans-Werner Sinn, president of the Ifo Institute for Economic research.

A German court decision criticizing the European Central Bank's government bond buying program could threaten the bank's ability to activate the program, as the Bundesbank is unlikely to participate, the president of the German IFO Institute for Economic Research has said.

German economist, Hans-Werner Sinn, who also serves on German economy ministry's Advisory Council said he doubted whether Germany's central bank would back the program, known as Outright Monetary Transactions (OMT).

(Read more: Germany will send bond-buying program to European court)

Germany's highest constitutional court shocked markets earlier this month by criticizing the OMT, which has been credited with calming financial markets and bringing down borrowing costs for troubled euro zone countries.

"The Court considers the OMT decision incompatible with primary law," it said.

The court did not issue a final ruling on the legality of the plan, but instead referred the case to the European Court of Justice (ECJ). The ECJ is expected to issue its verdict in March. The decision dealt a blow to the ECB's president Mario Draghi, who unveiled the OMT in July 2012 with his pledge to do "whatever it takes" to save monetary union.

Hans-Werner Sinn
Michael Gottschalk | AFP/Getty Images
Hans-Werner Sinn

"Definitely the German constitutional court said that the ECB oversteps its mandate. Now the question is what will the Bundesbank do in this situation before the ruling has really taken place. Perhaps it will not participate, no one knows," said Sinn.

I doubt that it [the Bundesbank] would participate because if the German constitutional court said the ECB is overstepping its mandate and also said that German institutions, including the Bundesbank, are not allowed to participate in actions of international bodies that overstep their mandate, can they do that?" he added.

Sinn said the program had created a lot of confidence had contributed to the narrowing of bond spreads. "But this type of activity is not up to the ECB. It's a purely fiscal activity, which the court argues is not within the mandate of the ECB, " he said.

"The ECB has a very limited mandate, mainly to ensure transactions, that they run smoothly between the countries and price stability and not much more. The ECB thinks it has the mandate to rescue Europe – it hasn't," he said.

By CNBC's Jenny Cosgrave: Follow her on Twitter @jenny_cosgrave

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