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3rd Dec 2022

EU top lawyer backs ECB bond programme

The European Central Bank’s programme allowing it to buy potentially unlimited supplies of government bonds to protect against speculative attack is within EU law, a top EU lawyer has said.

In a legal opinion released on Wednesday (14 January), European Court of Justice advocate general Pedro Cruz Villalon found that the Outright Monetary Transactions (OMT) programme did not breach the ECB’s mandate under the EU treaties.

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  • The ECB's bond-buying programme is legal, the ECJ's advocate general has said. (Photo: TPCOM)

“The objectives of the programme are in principle legitimate and consonant with monetary policy,” he said.

Cruz Villalon’s opinion does not give the ECB a carte blanche, however, stating that the ECB must “refrain from any direct involvement in the financial assistance programme that applies to the State concerned” if it intervened to buy its government bonds.

This could have implications for the ECB’s status on the so-called Troika, alongside the European Commission and IMF, which agrees and polices the bailout programmes in Greece, Cyprus and Portugal,

Meanwhile, the ECB would be required to 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”.

ECB President Mario Draghi announced the programme in September 2012 after market speculation that Spain or Italy would require an EU bailout or default threatened to push interest rates on their government bonds to unsustainable levels.

At the time, Draghi stated that the ECB would do “whatever it takes” to prevent the breakup of the eurozone.

The ECB said that countries would have to be subject to a financial rescue programme and agree to a memorandum of economic reforms for their bonds to be eligible for purchase by the ECB.

It is yet to buy a single bond under the programme.

However, the planned scheme is subject to a legal challenge initially filed with the German constitutional court in Karlsruhe by a group of plaintiffs led by Peter Gauweiler - a Bundestag deputy from the Bavarian Christian Social Union, as well as several academics, and the opposition Die Linke party.

Gauweiler had argued that the programme broke EU treaty rules prohibiting the ECB from directly financing national governments, while others had argued that the programme gave the bank sweeping powers without sufficient democratic oversight.

In his opinion, Cruz Villalon remarked that the treaty “does not prohibit transactions on the secondary market (since if it did the Eurosystem would be deprived of a vital tool for the ordinary conduct of monetary policy)”.

“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,” he noted.

Legal opinions are not binding on the EU’s top court court but usually form the basis for final judgements.

Roberto Gualtieri, chairman of the European Parliament’s Economic affairs committee, said that he was “satisfied” with the opinion.

The requirement for the ECB to stay out of involvement in individual countries should be reflected in the bank’s role on the Troika, he added.

For his part, Burkhard Balz, an MEP from Angela Merkel’s Christian Democrat party said that requiring more detailed explanations from the ECB would bring “more transparency to its monetary policy and strengthens the ECB's credibility".

"If the court follows the Advocate-General, this could dispel concerns and strengthen the Euro", Balz added.

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