European Court Extends Backing To ECB's Bond-buying Plan
January 14 2015 - 9:13AM
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An earlier bond-buying programme announced by the European
Central Bank won a crucial legal backing from the top EU court on
Wednesday, giving boost to speculation that the central bank may
opt for full blown quantitative easing as early as this month,
which could include government debt purchases, as it battles the
threat of deflation in the euro area.
In his opinion note, Advocate General Pedro Cruz Villalon of the
EU Court of Justice said, " The OMT programme..falls within the
monetary policy for which the Treaty makes the ECB responsible and
does not constitute an economic policy measure, provided that,
throughout the whole period of implementation of any OMT programme,
the ECB refrains from any direct involvement in the financial
assistance programmes to which the OMT programme is linked."
"The stated objectives of the OMT programme may in principle be
accepted as legitimate," he said.
The OMT programme was announced by the ECB on September 6, 2012,
amid the peak of the sovereign debt crisis in Europe, when even the
survival of the euro as a single currency was threatened as the
speculation of a break-up of Eurozone gained strength. Under the
scheme, the central bank planned to buy government bonds subject to
certain conditions. However, the plan was never put into
practice.
The ECB bond-buying scheme was challenged in the German Federal
Constitutional Court by some including politicians and academics,
who alleged that the central bank was acting beyond its mandate in
its move to buy state debt. Subsequently, the German Court referred
the case to the ECJ, questioning the legality of the OMT
programme.
Cruz Villalon said the OMT was "an unconventional monetary
policy measure". He also stressed that the central bank must be
afforded "a broad discretion for the purpose of framing and
implementing" the EU's monetary policy.
"The Courts, when reviewing the ECB's activity, must therefore
avoid the risk of supplanting the Bank, by venturing into a highly
technical terrain in which it is necessary to have an expertise and
experience which, according to the Treaties, devolves solely upon
the ECB. Therefore, the intensity of judicial review of the ECB's
activity, its mandatory nature aside, must be characterized by a
considerable degree of caution," he said.
Advisers' opinions are non-binding on the Court, but the judges
usually follow the same while issuing the final ruling after few
months. The view was welcomed by markets as it boosted hopes that
the bank will be more confident of a full scale quantitative
easing. The next ECB policy review is due on January 22.
After December's meeting, ECB President Mario Draghi sent a
strong signal that the bank was readying more measures in the
backdrop of the worrying economic situation that has been further
marred by the falling oil prices.
With Eurozone inflation turning negative for the first time in
more than five years in December, driven by a steep fall in energy
prices, the bank has come under more pressure to do more. And
recent rhetoric from ECB policymakers also hinted that the bank was
gearing up to unveil more measures.
Wednesday's court backing is a welcome relief for the ECB as
Germany has been voicing strong opposition to measures such as
buying state debt.
"This is an important milestone in request for preliminary
ruling. OMT is ready and available," the ECB said on its Twitter
feed after the news came.
"We have always been convinced that OMTs are legally sound and
in line with our mandate," ECB Executive Board member Yves Mersch
said.
"Any decision the Governing Council takes will be motivated by
and restricted by its mandate to ensure price stability."
Elsewhere today, Draghi said in an interview published in the
German daily Die Zeit that the risk of deflation was greater than
what it was a year ago. He also said that while the Governing
Council remained unanimous in its aim to achieve price stability,
there are differences as to what measures to take. He added that
the central bank was not left with many options.
Cruz Villalon also pointed out that "setting an ex ante
quantitative limit on purchases of government bonds would seriously
undermine the effects which the intervention on the secondary
market seeks to achieve, with the risk of triggering
speculation."
Further he said, if ECB does not have preferential creditor
status, it will ensure a more effective normalization of market
prices for government bonds as it boosts investor confidence.