The European Central Bank won crucial backing yesterday for its pledge to do whatever it takes to support the euro when a top EU legal adviser removed a key hurdle to the bank’s plans to buy government bonds to bolster the economy.
Pedro Cruz Villalon, advocate general to the European Court of Justice, said a 2012 ECB bond-buying plan, designed at the height of the eurozone crisis to avert a break-up of the single currency and unused so far, did not break EU law.
The opinion was a clear rebuff to German critics of the plan, who argue the ECB has exceeded its mandate by planning to buy bonds.
“The OMT programme... falls within the monetary policy for which the (EU) Treaty makes the ECB responsible,” said Cruz Villalon, in an opinion which was met by enthusiasm on financial markets.
The euro tumbled to below its launch level for the first time in a decade after the court opinion was published, as investors took the view that the ECB had received a green light to push ahead with its plans.
The adviser’s opinion, which is usually a guide to how the court will rule, was a milestone in a long-running dispute about printing money and the limits of central bank powers between the ECB and Germany, the largest member of the 19-country bloc.
It was a setback for those in Germany’s conservative financial establishment who want to stop ECB plans to print fresh money to buy government bonds and a boost for the Frankfurt-based central bank.
ECB executive board member Yves Mersch said the opinion showed that the bank had “considerable discretion” over policy.
Marcel Fratzscher, president of the Berlin-based German Institute for Economic Research, said the opinion was a victory for the ECB.
“Such a strong and overwhelming support for the ECB is surprising and could not have been expected,” he said. “I expect this recommendation to strengthen the position of the ECB and make a new ECB purchase programme of government debt more likely.”
The bank is on the verge of announcing a QE scheme, possibly as early as next week, to combat deflation and put the struggling economy back on a steady footing.
But it has yet to decide on crucial details of that plan, including whether it is limited or open-ended, whether risk is shared or remains with national central banks, and whether it covers all eurozone states or excludes those whose debt is rated below investment grade, such as Greece and Cyprus.
In his opinion, the adviser fired a shot across the bows of the German Constitutional Court, which had referred the question to Europe’s top court, saying it was hard for courts to call the ECB into question as they had little expertise to do so.
“The ECB must have a broad discretion when framing and implementing the EU’s monetary policy, and the courts must exercise a considerable degree of caution when reviewing the ECB’s activity, since they lack the expertise and experience which the ECB has in this area,” a statement said.
While not binding, his opinion is typically followed by the court’s judges, who are due to deliver their ruling in the coming months.
Crucially, the advocate general cautioned against limiting the ECB’s room for manoeuvre, warning against the imposition of a cap on the amount of bonds the ECB could buy. That has important implications for its next move to print fresh money.
Setting such a limit “would seriously undermine the effects which the intervention on the secondary markets seeks to achieve, with the risk of triggering speculation”, he said.
He also expressed doubt about granting the ECB any seniority over other creditors in the event of a default – an issue of particular importance to investors whose support is needed for any ECB intervention to work.
“If the status of preferential creditor were granted to the ECB, that would call into question the position of other creditors,” he said in his written opinion.
One German critic of the ECB, Gunnar Beck, a legal expert at the University of London, said that if followed by the court, the opinion would make the central bank “untouchable”.
“This effectively grants the ECB and the crisis management of the eurozone an exemption from the law. It is a suspension of the rule of law in Europe,” he said.
Germany’s Constitutional Court, asked to rule on complaints by a group of Eurosceptic politicians and lawyers, said last year there was good reason to believe the OMT plan broke rules forbidding the ECB from funding governments.
It referred the case to the European court for its view but implicitly reserved the right to give its final ruling.
Regardless of the outcome of the case, opposition from Germany’s influential Bundesbank and a sceptical public may limit the size or scope of any QE scheme.