Bond-buying programme compatible with EU law says ECJ

The European Court of Justice has said that the ECB’s controversial Outright Monetary Transactions (OMT) programme is compatible in principle with EU law, but only if certain conditions are met.

The legal opinion issued this morning by the advocate general of the Court is likely to be welcomed by the European Central Bank ahead of next week's governing council meeting.

The case concerns an action taken by a group of German citizens and the political party, Die Linke, against the German government for failing to take action against the ECB’s bond-buying programme, known as Outright Monetary Transactions (OMT).

The OMT programme, which is widely credited with calming the euro zone debt crisis when it was announced by Mario Draghi in September 2012 , involves the ECB buying the bonds of euro zone countries in a bailout programme.

In the opinion issued this morning , the Court’s advocate general says that the objectives of OMT are “in principle legitimate and consonant with monetary policy,” thought it notes that the ECB must give “a proper account of the reasons for adopting an unconventional measure such as the OMT programme, identifying clearly and precisely the extraordinary circumstances that justify the measure.”

Pointing out that the OMT programme is “incomplete” and has never been implemented, it notes that the Court’s analysis of the case had been carried out on that basis.

“The OMT programme is necessary as well as proportionate in the strict sense, since the ECB does not assume a risk that will necessarily make it vulnerable to insolvency,” the opinion states, though it adds that the finding is conditional upon how the OMT programme is actually implemented.

It also states that OMT will have to be implemented in such a way that a market price for the government bonds can be formed, so that there continues to be a real difference between the purchase of bonds on the primary and secondary market.

Today’s opinion is a non-binding decision, with a final decision expected in between four and six months. The ECJ generally upholds the opinion of its advocate generals, but has in some high-profile cases disagreed with the original opinion.

Nonetheless, the failure of the advocate general to outlaw OMT at this juncture is likely to be welcomed by the ECB which is likely to announce some form of full-scale quantitative easing programme next week. The OMT programme is widely seen as a predecessor to a more wide-ranging quantitative easing, or bond-buying, scheme.

Significantly, this morning’s legal opinion also states that the ECB should have “a broad discretion when framing and implementing the EU’s monetary policy.” It notes that 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.”

The ECB has been facing increasing pressure to announce further stimulus for the euro zone economy as the bloc struggles with low inflation and weak economic growth. However, Germany is opposed to a quantitative easing programme, which many analysts believe is essential to stimulate the euro zone economy.