2nd Oct 2023

EU court rejects challenge to ECB bond plan

  • The EU's top court has thrown out a German legal challenge to the European Central Bank's bond-buying scheme aimed at protecting the euro

The European Central Bank’s flag-ship bond-buying scheme, which was widely credited with staving off the eurozone debt crisis in 2012, is in line with the EU treaties, the bloc’s top court has said.

In a ruling on Tuesday (16 June), the European Court of Justice threw out a German legal challenge to the bank’s Outright Monetary Transactions (OMT) programme, which it said “falls within monetary policy and therefore within the powers of the ESCB”.

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ECB boss Mario Draghi announced the creation of the OMT programme in September 2012, during the height of the eurozone debt crisis.

He was pushed into action after market speculation that Spain or Italy would require an EU bailout or default threatened saw the interest rates on the government bonds rise to almost unsustainable levels.

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

The programme allows the Frankfurt-based bank to buy potentially unlimited supplies of eurozone government bonds.

In return, 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.

Draghi’s three words - plus the announcement of the programme - calmed financial markets as it signalled that the ECB was prepared to step in, if necessary, as the eurozone’s lender of last resort.

The ECB, which has consistently argued that the scheme was aimed at maintaining price stability, is yet to buy a single bond under the programme.

However, the scheme was quickly challenged by a group of 11,000 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 in the powerful German Constitutional Court in Karlsruhe.

The Gauweiler-led plea argued that government bond-buying would break EU treaty rules prohibiting the ECB from directly financing national governments, while Die Linke had argued that the programme gave the bank sweeping powers without sufficient democratic oversight and created a potential conflict of interest for the bank.

In its ruling, the Luxembourg court stated that “the Treaties permit the ECB and the national central banks to operate in the financial markets by buying and selling outright marketable instruments in euro,” adding that “in view of its specific features, the OMT programme cannot be equated with an economic policy measure”.

However, the court stated that if and when the ECB does decide to buy government bonds under the programme “sufficient safeguards must be built into its intervention to ensure that the latter does not contravene the prohibition of monetary financing”.

“Even if widely expected, this ruling still brings a relief at the ECB and in financial markets,” said ING chief economist Carsten Brzeski.

“The ECJ gave a strong backing to the ECB’s independence and sent a sad message to some Germans: there is European life outside the German borders,” he added.

For his part, Roberto Gualtieri, the chairman of the European Parliament’s Economics committee, described the ruling as “a very important and timely clarification from the EU's highest court and will contribute to the stability of the euro area.”

“I am confident that this historic ruling will instil the euro area with a renewed determination to face the current challenges,” he added.

The OMT programme was the forerunner for the ECB’s landmark €60 billion per month quantitative easing programme, launched this March, which also allows it to buy government bonds.

Speaking in the European Parliament on Monday, Draghi reiterated that the bank would maintain the programme until September 2016 at the earliest, in a bid stimulate economic activity and move the eurozone’s inflation rate closer to its 2 percent target.

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