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Forget Karlsruhe

14 Jan 2015 By Neil Unmack, Olaf Storbeck

The European Court of Justice is giving QE a helping hand. Its advocate general has blessed the principle of ECB government bond-buying, with few conditions attached. That provides cover for the central bank’s quantitative easing plans – and will do little to soothe German opposition to the ECB’s policies.

The European court opinion on the legality of Mario Draghi’s 2012 crisis-prevention tool, the outright monetary transactions, looks like an odd relic. The OMT, a plan to buy the sovereign debt of countries locked out of markets once they sign up to a bailout, has never even been used, and is unlikely to be if the ECB does follow suit on its plan to deploy more massive systematic bond-buying.

Yet the ruling of the ECJ, which often follows its advocate general, will matter because it will help set the legal framework for the eventual ECB quantitative easing programme.

The legal dispute, triggered by a lawsuit of German academics opposed to the ECB’s policies, comes down to two questions: whether the ECB would be exceeding its monetary policy mandate by buying government debt, and whether it would break European rules against funding governments by exposing itself to potential losses.

The opinion basically approves Mario Draghi’s plans, subject to some mild restrictions. It leaves the ECB the flexibility it needs. The central bank could, for example, be treated as other bondholders in a restructuring. More broadly, the opinion steers clear of intruding too closely on monetary policy.

The move reduces one potential risk for the ECB. But it’s not a green light. If the ECJ follows the ECB’s advocate general’s line, the German constitutional court would find itself in an odd situation. In its February 2014 ruling, the Karlsruhe judges made clear they thought the ECB was acting outside its remit. If they don’t agree with the ECJ’s legal reasoning, they could in theory instruct the German Bundesbank not to cooperate with the bond-buying programme. Even avoiding that extreme outcome, the ECJ’s preliminary opinion will do nothing to assuage German fears that monetary policy in the euro zone is running out of control.


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