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The European Court of Justice (ECJ) has this morning ruled that it considers the ECB’s bond buying programme, the Outright Monetary Transactions (OMT), to be in line with EU law. As such, it has put the German Constitutional Court in a tough position.
16 June 2015
For background on this entire issue, see our previous detailed blog. The full ruling is here and the press release here. For the referral from the German Constitutional Court see here and out take here.
The ECJ supported the ECB for a number of key reasons:
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.
Conditions include, in particular, the fact that it is strictly subject to the objectives pursued and is limited to certain types of bonds issued by Member States selected on the basis of precise criteria linked to those objectives.
As we noted before, one of the key issues in all of this was the conditions attached to ECB purchases. While the German Constitutional Court was probably realistic about the expected approval of the programme by the ECJ, there was a strong feeling that conditions should be attached.
However, the ECJ ruling seems to offer little in the way of conditions, even less so that the opinion by the ECJ Advocate General in January. Interestingly, the ECJ chose not to take on comments by the Advocate General which were seen to limit the ECB’s involvement in the EU/IMF/ECB Troika if and when the OMT is used. It also seems likely that the approach taken to Quantitative Easing (QE) which set limits on the amount of bonds from a single market which the ECB can own, along with the case put forward at the court, was sufficient to stop the ECJ requesting additional conditions.
The case will now return to the GCC which will have to issue a final ruling on the original case brought to it. As we have said before, it was clear from the GCC’s original opinions and referral that it believed the OMT to be illegal. As such, it now has some tough choices to face up to.
One of the key concerns of the GCC was the potentially unlimited nature of the bond purchases.This concern seems to have been largely dismissed by the ECJ which suggests, despite the lack of a clear quantitative limit, the other conditions and limits (such as which bonds can be bought and when) result in a similar effect.
The German court also raised questions over whether the ECB would be a senior creditor or not and therefore whether it would need to take losses in a debt restructuring. While this issue is raised in the backgroun to the case it does not seem to be addressed directly in the ECJ ruling, suggesting it does not see it as relevant to the case.
The ECJ also dismissed concerns that the OMT is an economic rather than monetary policy. It’s not clear yet whether the ECJ’s argument, that the economic effects are indirect rather than a targeted objective, will fly with the GCC. Given that the clear target of the programme was to help keep the euro together, it seems the ECJ argument here might be a bit weak.
Given its very tricky predicament, second guessing its actions is incredibly difficult. It will have to tread a fine line in order to both maintain its credibility but not undermine EU law or the ECB’s actions (whether or not the latter should be a concern of the court or not is a separate question, but it has previously seemed to acknowledge outside circumstances in its rulings).