The European Central Bank’s 2012 bond-buying program won the backing of the European Union’s highest court, expanding ECB President Mario Draghi’s crisis-fighting arsenal.
The EU Court of Justice said in a ruling in Luxembourg Tuesday that the Outright Monetary Transactions program doesn’t exceed the powers of the ECB in relation to monetary policy.
The ECB announced details of the OMT plan in September 2012, as bets multiplied that the euro area would break apart, and after Draghi’s promise to do “whatever it takes” to save the currency. The calming of financial markets produced by the still-untapped OMT program helped the euro area emerge from its longest-ever recession.
Less than three years later, Greece is again edging toward an exit from the single currency as talks with creditors fail to unlock bailout funds. The ruling from the EU court may end legal challenges to ECB programs, said Nick Kounis, head of macro research at ABN Amro Bank NV in Amsterdam.
“Having the OMT ready without impediments is a good thing, in terms of the escalating Greek exit risks,” Kounis said.
In Germany, where the case was filed by a group of academics who frequently challenge EU financial programs, some were unhappy with the ruling.
“The OMT program is a rescue program for the highly indebted periphery countries,” said Clemens Fuest, president of the ZEW Center for European Economic Research in Mannheim. “This is fiscal policy, not monetary policy.”
Lawmakers countered that a ruling against the OMT would have wreaked havoc at a time when markets were already jittery because of Greece’s financial crisis.
“I am very relieved,” said Gerhard Schick, finance policy spokesman in Germany’s lower house of parliament for the opposition Green party. “A different decision would have been fatal.”
The EU court has been examining the OMT program since Germany’s own top court last year sought guidance on the case.
The German judges expressed concern that the tool may have gone beyond the central bank’s mandate, and might be a form of monetary financing of governments, which EU treaties ban.
ECB Executive Board member Yves Mersch said the ruling “confirmed that we brought all the necessary diligence to invalidate the possible risks of being outside our mandate.”
The case will now go back to the German courts for further review in line with the EU judges’ ruling.
No Blank Check
The court “did not give a blank check to the ECB, but subjected it to ongoing conditions which should make the judgment more acceptable to the German Constitutional Court,” said Pierre-Henri Conac, a professor of financial-markets law at the University of Luxembourg. “The ECJ has effectively cornered them with a detailed justification of the legality of the OMT.”
The ruling may also smooth the way for other ECB programs, including quantitative easing.
Since the ECB started its 1.1 trillion-euro ($1.24 trillion) QE program three months ago, the inflation rate in the 19-nation euro area has turned positive, though it remains far short the ECB’s goal of just below 2 percent.
In Tuesday’s decision, the EU high court held that the OMT program was announced during a “special situation” where “interest rates on the government bonds of various states of the euro area were characterized by high volatility and extreme spreads.”
“It does not appear” that the ECB’s analysis of the situation was wrong, the judges said.
Addressing the German court’s concerns about selectivity in the ECB’s program, the court said “this program is intended to rectify the disruption of the European System of Central Banks’ monetary policy, which arose as a result of the particular situation of government bonds issued by certain” EU nations.
The case is: C-62/14, Peter Gauweiler and Others.