Green light for ECB’s bond plan to spur QE

Advocate general says programme is legal and bank does not risk insolvency.

Mario Draghi, president of the European Central Bank. Daniel Roland / AFP

The European Central Bank’s (ECB) bond buying plan is legal in principle, a senior European legal advocate said, clearing the way for the ECB president Mario Draghi to proceed with quantitative easing (QE) later in the year.

Pedro Cruz Villalon, an advocate general at the European Court of Justice (ECJ), said the programme was legal “in principle … necessary … [and] proportionate in the strict sense” because there was no chance that the ECB could be made insolvent by the policy. Analysts said Mr Villalon’s remarks would probably insulate Mr Draghi’s imminent QE programme from future legal challenges.

Mr Villalon said the ECB’s programme should be subject to conditions, including a requirement that the ECB cannot buy bonds of states in receipt of direct financial aid transfers from the European Union.

This means the ECB may have to pull out of its role as a member of the “troika” of agencies involved in the rescues of Greece and Cyprus.

Mr Villalon added the ECJ should not limit the size of the central bank’s bond purchases. This could “seriously undermine the effects which the intervention on the secondary market seeks to achieve, with the risk of triggering speculation”, the advocate-general said.

Mr Villalon also warned courts to exercise self-restraint when deciding on EU-wide 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 said. Mr Villalon’s comments are likely to bear on the legality of EU-wide quantitative easing.

Holger Zschaepitz, an editor at the German newspaper Die Welt, described the advocate-general’s remarks as a “green light” for the policy.

The ECJ’s final ruling, expected in four to six months, is likely to follow the advocate’s opinion.

The legal argument centred on the ECB’s bond-buying programme, announced in 2012, in which the central bank committed to buying up the bonds of beleaguered euro-zone economies after Mr Draghi promised to do “whatever it takes” to save the euro. At this time, yields on the government debt of Portugal, Italy, Greece and Spain were rocketing as investors speculated that austerity and recession could force any of those heavily-indebted nations to leave the euro zone, or default on their debts.

Germany, where commitment to balanced budgets and fiscal austerity are accepted among the chancellor Angela Merkel’s Christian Democrats, reacted with scepticism to the bond-buying programme, with some politicians arguing it would encourage irresponsible fiscal profligacy.

In February 2014, Germany’s highest court said it believed the bond-buying programme was illegal because the ECB had exceeded the powers given to it in the European treaties that underpin the EU. But the German court said it would defer to the opinion of the ECJ.

The adviser’s opinion is another milestone in a long-running dispute about printing money between the ECB and Germany, the largest member of the 19-country bloc. With inflation falling below zero per cent in November, and annualised EU-wide economic growth hovering at less than 1 per cent, the prospect of Japan-style deflation has led Mr Draghi to hint heavily that quantitative easing could be on its way.

Mr Villalon’s opinion may limit Mr Draghi’s room for manoeuvre, allowing critics to argue in court that full-blown QE – unlike the bond buying programme alone – could bring the ECB close to insolvency.

The euro fell to €1.174 to the dollar in midday trading yesterday, its lowest level for more than a decade, as investors took the view that the ECB would push ahead with QE, probably to further devalue the currency.

“There is nothing in this ruling that blocks QE,” said Marc Ostwald, a strategist at ADM Investor Services International.

Jonathan Loynes, the chief European economist at Capital Economics, agreed. “The final hurdle to quantitative easing appears to have been cleared,” he said. “But given the ECB’s natural caution, Germany’s objections, and the limited effects of QE in other countries, it would be hopeful to expect it to transform the euro zone’s economic outlook.”

* The National, with additional reporting by Reuters