The European Central Bank scored a landmark victory Tuesday when the EU's top court ruled its scheme to buy potentially unlimited amounts of government bonds was legal. A number of groups of German eurosceptics had contested the ECB's OMT - or Outright Monetary Transactions - programme, unveiled in 2012, claiming it overstepped the central bank's mandate and was effectively a way of printing money to pay off a government's debt. But the European Court of Justice threw out those arguments in a widely anticipated ruling, saying that the scheme was indeed compatible with EU law.
"This programme for the purchase of government bonds on secondary markets does not exceed the powers of the ECB and does not contravene the prohibition of monetary financing of member states," the court said in a statement. "The EU Treaties permit the (ECB) to adopt a programme such as the OMT programme.
"The court finds that the OMT programme, in view of its objectives and the instruments provided for achieving them, falls within monetary policy and therefore within the powers of the (ECB)," it said. The verdict marks an important milestone for ECB chief Mario Draghi who vowed in 2012 to do "whatever it takes" to prevent a break-up of the single currency area. In fact, the OMT has never been activated and Draghi insists that its mere announcement was enough to assuage such fears. But experts say the ECJ ruling could also shield the ECB from legal attacks to its subsequent 1.14-trillion-euro ($1.3-trillion) quantitative easing programme, or QE, which was launched earlier this year. Under that programme, the ECB will buy up to 60 billion euros of bonds per month at least until September 2016, with the aim of reflating the eurozone economy.
The head of the German central bank or Bundesbank, Jens Weidmann, voted against both the OMT and the QE programmes. Some 37,000 eurosceptics had initially taken their case against OMT to Germany's Federal Constitutional Court or Bundesverfassungsgericht. In 2014, the court partially agreed with their arguments, ruling that "there are important reasons to suggest that it goes beyond the ECB's monetary policy mandate and infringes on the powers of the member states and contravenes the ban on monetary deficit financing."
But it passed the case on to the ECJ in Luxembourg before issuing its final ruling. With its decision on Tuesday, the ECJ shot down the German court's misgivings. In a short statement, the ECB said it "welcomed the ruling", but that it would "study the text before communicating further." The chairman of the EU parliament's committee on economic and monetary affairs, Roberto Gualtieri, was equally pleased. "This is a very important and timely clarification from the EU's highest court and will contribute to the stability of the euro area and of the EU at large," Gaultieri said.
"I am confident that this historic ruling will instil the euro area with a renewed determination to face the current challenges." Bert Van Roosebeke, an economist at Freiburg's Centre for European Policy, saw the ruling as "a very clear defeat for the German constitutional court." By contrast, one of the most prominent eurosceptics, Hans-Werner Sinn who heads the leading economic think-tank Ifo, saw the ECJ ruling as a "regrettable mistake." "The court's economic arguments are not correct or comprehensible," Sinn said. Christoph Degenhart, a professor in constitutional law at Leipzig University who is challenging the ECB's subsequent QE programme in Germany's highest court, said he would press ahead with his complaint, and suggested a ruling on that could come "in the autumn or at the end of the year."
But ING DiBa economist Carsten Brzeski believed the ECJ ruling "should clearly discourage new lawsuits against QE." "The crucial question (now) is whether the German constitutional court will simply embrace the ECJ's ruling or not," he said. "Even if in theory the German court could still come with a different ruling, it is hard to see that this would really happen in reality. It would lead to a legal conflict between two strong courts with reputational damage for all," he said. All in all, "today's ECJ ruling should bring some relief to markets," Brzeski concluded.
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