A bond-buying programme announced by the European Central Bank in 2012, which helped to calm the financial markets amid the peak of the sovereign debt crisis, was upheld by the top EU court on Tuesday, further strengthening ECB President Mario Draghi's crisis-fighting efforts.
Responding to a challenge from German politicians and academics, the European Court of Justice in Luxembourg said the outright monetary transactions, or OMT, programme is compatible with EU law. On January 14, Advocate General Pedro Cruz Villalon had given a favorable opinion on the bond-buying programme.
"This programme for the purchase of government bonds in the secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of Member States," the court said in its ruling.
The OMT programme was announced by the ECB on September 6, 2012, when the survival of the euro as a single currency was threatened amid the strengthening of speculation of a break-up of Eurozone. The announcement helped to calm the markets, but the plan was never put into practice.
Almost three years later, concerns of a euro area break-up remain with as the Greek conundrum refuses to abate. Policymakers and leaders have intensified efforts to reach a sustainable solution.
Under the OMT scheme, the central bank planned to buy government bonds of a country, subject to certain conditions, when its borrowing costs reached unsustainable levels. Only those euro area countries who have sought help from the EU and who agree to prescribed reform programmes will be considered.
The ECB bond-buying scheme was challenged in the German Federal Constitutional Court by some politicians and academics, who alleged that the central bank was acting beyond its mandate in its move to buy state debt. Subsequently, the German Court referred the case to the ECJ, questioning the legality of the OMT programme, while reserving its right for final ruling.
The court observed that the OMT programme "falls within monetary policy and therefore within the powers" of the European System of Central Banks, or ESCB.
"A monetary policy measure cannot be treated as equivalent to an economic policy measure merely because it is likely to have indirect effects on the stability of the euro area," the court said in the ruling.
The court also instructed the ECB to set sufficient safeguards for purchasing government bonds in the secondary markets to ensure that such intervention does not contravene the prohibition of monetary financing.
The latest court ruling comes as a victory for the ECB and its chief Draghi, who announced a EUR 1.1 trillion full-blown quantitative easing programme on January 22. Under the scheme, the bank decided to buy EUR 60 billion debt every month from March this year and until September 2016. While only state debt was considered for OMT, private sector securities were also included in the new 'expanded asset purchase programme'.
ECB's stimulus efforts have already started to show some effect in the euro area economy. Consumer prices increased for the first time in six months in May.
"Today's ECJ ruling should bring some relief to markets. In these times, when Eurozone policymakers are realizing that a Grexit would lead to contagion on financial markets, at least in the short run, confirming and strengthening the ECB's OMT is almost existential," ING Bank economist Carsten Brzeski said.
"Up to now, OMT has been the ECB's most powerful tool, and actually the most powerful tool which did not cost a single euro. The ECJ gave a strong backing to the ECB's independence..."
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