World Economy

Eurozone Reform Efforts Failing

Eurozone Reform Efforts FailingEurozone Reform Efforts Failing

Eurozone governments have eased up on efforts to overhaul their struggling economies because the ECB’s ultra-easy monetary policy has pushed their borrowing costs to record lows, ratings agency Standard & Poor’s said.

Speaking in London, S&P’s top Europe, Middle East and Africa analyst Moritz Kraemer said there was a strong relationship between government bond yields–an indicator of how much countries must pay to borrow–and their willingness to undertake structural reforms, Reuters reported.

The European Central Bank’s €1.7 trillion ($1.92 trillion) asset purchase scheme has helped push yields lower across the eurozone, with yields on German bonds maturing in eight years or less now in negative territory.

“All of these (reform) efforts from the governments have really fallen by the wayside under the palliative that the ECB is providing,” Kraemer told the Euromoney Global Borrowers & Bond Investors Forum.

ECB policymakers have been urging governments to take advantage of easy financing conditions to implement reforms and make sure the bloc’s slow recovery becomes more sustainable.

But “the moment the pressure goes away, the action goes away as well”, said Kraemer.

In a normal interest rate environment, Kraemer said, government deficits across the bloc would be 1.5 to 2 percentage points of GDP higher, which would force the issue of reform up the agenda for many states.

“I’m not just talking of Italy’s deficit being close to 3%, I’m talking of close to 5%, and there would certainly not be a surplus in Germany.”

S&P said earlier this month that a number of major economies could see their credit ratings cut or outlooks lowered if record low interest rates rise to more normal levels.

Bond Buying

Germany’s highest court has dismissed constitutional challenges to the ECB’s bond-buying program OMT, presented by the Frankfurt bank at the height of the euro crisis to stabilize the single currency.

The closely-watched ruling came after almost 40,000 complaints were lodged against the program with Germany’s constitutional court in Karlsruhe.

Complainants feared the as-yet not activated program from 2012 to buy up bonds of struggling euro members breached the Frankfurt central bank’s mandate, amounted to illegal monetary financing and would—if activated—create a massive financial liability for Germany.

Conditions Placed

On Tuesday the constitutional court ruled that the Bundesbank may participate in the OMT program if, among under conditions, the purchases are limited from the outset; the purchases are not announced in advance; and the bonds are only in exceptional cases held until maturity.

If these and other conditions are met, the court ruled: “The OMT program does not present a constitutionally relevant threat to the Bundestag’s right to decide on the budget.”

The court added that the OMT bond-buying program “does not violate the complainants’ rights” and that the rights of German federal parliament’s rights and obligations regarding European integration, including budgetary responsibility “are not impaired” by OMT.

However the court ordered Berlin’s federal government and parliamentarians to “closely monitor any implementation of the OMT program” and intervene if any “specific threat to the federal budget” arose—either through the volume or risk of bonds purchased.

In the middle of the euro crisis, ECB President Mario Draghi’s promise to “do whatever it takes” to stabilize the single currency area was greeted with cheers by spooked financial markets. But the promise horrified German politicians and savers, who feared the ECB, by opening the door to bond-purchases of struggling euro member states, had crossed the red line into forbidden monetary financing.

They launched a long and bitter battle against ECB bond-buying and, following oral hearings three years ago, it seemed that a majority of judges in Karlsruhe agreed with the German critics.