Plans for a quantitative easing programme for the euro zone received a significant boost yesterday, after the European Union’s highest court said the European Central Bank’s outright monetary transactions (OMT) programme was compatible “in principle” with EU law.
In a landmark legal opinion by an advocate general of the court, the European Court of Justice said that the OMT "falls within the monetary policy for which the [EU] treaty makes the ECB responsible".
While noting the finding is conditional upon how the yet-unused OMT programme is implemented, the opinion stated the bond-buying was “necessary as well as proportionate”.
OMT was “in principle legitimate and consonant with monetary policy”, according to the opinion of one of the court’s nine advocates general, Pedro Cruz Villalon. However, he noted the ECB must give “a proper account of the reasons for adopting an unconventional measure such as the OMT programme, identifying clearly and precisely the extraordinary circumstances that justify the measure”.
The advocates general of the European Court of Justice deliver legal opinions on cases in advance of official rulings. In most cases, the court follows the advocate-general opinion. The timing of yesterday's opinion is highly significant, coming a week before the European Central Bank meets to consider the introduction of a quantitative easing programme, a proposal that is opposed by Germany.
Market prices
While approving the legality of OMT in principle, the ECJ’s legal opinion states the programme must be implemented in such a way a market price for the government bonds can be so there continues to be “a real difference between the purchase of bonds on the primary and secondary market”.
Wednesday’s opinion follows the German constitutional court’s decision last February to refer the case taken by a group of citizens and politicians about the legality of OMT to the European Court of Justice. The Karlsruhe-based court had ruled that OMT should be considered illegal under European law unless restrictions were imposed, although it referred the case to the European Court of Justice. It is highly unusual for the German constitutional court to refer a matter to the court.
Responding to the Luxembourg court’s announcement, the ECB said it was “an important milestone”, adding that “OMT is ready and available.”
OMT – a bond-buying programme targeted specifically at euro zone countries in bailout programmes – was announced by the ECB in September 2012. While it has never been used, it is credited with calming the euro zone sovereign debt crisis which was then at its zenith.
ECB executive board member Yves Mersch said the ECB has "always been convinced that OMTs are legally sound and in line with our mandate".
The ECB governing council meets in Frankfurt next Thursday for its first meeting of 2015 amid expectation the central bank was to announce some form of quantitative easing as euro zone inflation and growth figures continue to disappoint.
Green light
Analysts at Barclays said they considered the opinion to be “a green light for the ECB’s OMT and potential quantitative easing including government bonds and potential risk sharing in the event of a sovereign default or debt restructuring. “
The euro fell sharply following the announcement, as markets responded to the probability of an asset-purchasing programme being unveiled next week.
The legal opinion gave succour to supporters of the independence of the ECB. Among the findings in the advocate-general’s opinion is the Frankfurt-based bank should have “a broad discretion when framing and implementing the EU’s monetary policy”.
