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, in a ruling in Luxembourg Tuesday, said 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 that the still-untapped OMT program produced 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 that we’re seeing,” Kounis said. “It’s not 2012 but we are seeing some knock-on effects.”
German Courts
The EU court has been examining the OMT program since Germany’s own top court last year sought guidance on the case filed by a group of academics. The German judges expressed concerns 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.The a 15-judge panel of the EU court said there are some conditions on the plan, which have been met.
“A monetary policy measure cannot be treated as equivalent to an economic policy measure merely because it may have indirect effects on the stability of the euro area,” the court said. The ECB can “adopt a program for the purchase of government bonds on secondary markets,” such as OMT, which includes sufficient safeguards, the court said.
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.
Special Situation
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,” the court said. “It does not appear” that the ECB’s analysis of the situation was wrong, it said.Concerning the German court’s concerns about selectivity in the ECB’s program, the EU judges 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 will now go back to the German courts for further review in line with the EU judges’ ruling.
