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Brussels - 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 Eurozone 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 eurozone'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 objective.
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.
