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Berlin confident top court will uphold euro rescue ruling

MYT 11:55:01 PM

BERLIN (Reuters) - Germany's government expects the Constitutional Court to confirm an earlier ruling backing a euro zone rescue mechanism and EU officials said the European Central Bank's plans to buy bonds of stricken states was outside its remit.

German Chancellor Angela Merkel (L) talks with Family Minister Kristina Schroeder during a session of the Bundestag, the lower house of parliament in Berlin February 21, 2013. REUTERS/Thomas Peter
German Chancellor Angela Merkel (L) talks with Family Minister Kristina Schroeder during a session of the Bundestag, the lower house of parliament in Berlin February 21, 2013. REUTERS/Thomas Peter

The Bundesbank, a stern opponent of ECB plans to purchase debt of struggling euro zone members, sent a 29-page report to the court in December, which was published in a German newspaper on Friday, outlining the dangers of the plan.

The report warned that the ECB's purchase of such debt could "compromise the independence of the central bank" and be difficult to stop. The paper was dated December 21, 2012, when the euro zone crisis was in a more acute phase than it is now.

"The government ... is confident the Constitutional Court will completely confirm its decision from September 12, 2012, which was made on the basis of an extensive oral hearing and on the basis of which Germany was able to legally agree to the ESM (European Stability Mechanism)," a finance ministry spokesman said.

He did not go into detail about how the court might view the ECB's bond-buying plans, which it will also consider in the public hearing on June 11-12 before giving its final verdict, and which were at the centre of the Bundesbank's criticism.

In September's preliminary ruling, which gave a green light for Germany to ratify Europe's new permanent bailout fund, the court in Karlsruhe also said it would look at the ECB's role in the rescue when it delivers a final verdict.

Several euro zone officials said the court had no jurisdiction over the ECB, a European Union institution.

"The OMT programme is not a German piece of legislation, so it cannot be reviewed by the German court," one official said.

Karlsruhe could, however, find that the Outright Monetary Transactions(OMT) programme takes more sovereignty out of the hands of a democratically legitimate body than Germany's constitution allows. It could also refer that part of the case to the European Court of Justice instead of ruling on it.

Bundesbank chief Jens Weidmann, the most outspoken critic of OMT, will travel to Karlsruhe for the court hearing in June.

The OMT, a cornerstone of the policy response to the euro zone debt crisis, was unveiled in September and has calmed financial markets, but it has not been activated so far.

ECB'S ROLE

The ECB argues that the OMT is not disguised financing of governments, does not compromise the independence of the central bank, will not lead to inflation and does not create excessive risks for euro zone taxpayers.

Economists took the Bundesbank's attack in their stride.

"We share the ECB's view that the OMT falls squarely into the category of permissible tools of monetary policy ... the OMT was and is needed to repair the transmission mechanism of monetary policy," said Holger Schmieding of Berenberg Bank.

Government spokesman Steffen Seibert said Chancellor Angela Merkel had not intended to infringe on the ECB's independence by remarking on Thursday that, if the central bank were to look at Germany alone, it would actually have to raise interest rates.

"There is no reason to assume that the chancellor meant to give any kind of warning or suggestion to the ECB in her speech," Seibert told a regular news conference, adding her comments fully respected the independence of the ECB.

Seibert said the bankers listening to Merkel in Dresden had voiced a hope that the period of low interest rates would come to an end and she had simply explained to them that the ECB must address the needs of very divergent economies.

It is unusual for a head of government to comment on monetary policy. Merkel's statement came as the ECB's appears to be closer to lowering interest rates than at any time since it last cut them in July 2012.

(Editing by Mike Peacock)

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