Draghi Buoyed as EU Court Aide Supports 2012 Bond-Buy Plan

By Stephanie Bodoni

Photographer: Martin Leissl/Bloomberg

ECB President Mario Draghi signaled in an interview with Die Zeit that the ECB is ready... Read More

Mario Draghi won a legal endorsement as an adviser to the European Union’s top court said a bond-buying program designed to help save the euro area may only require fine tuning to bring it in line with EU law.
The European Central Bank’s Outright Monetary Transactions program won the conditional backing of Advocate General Pedro Cruz Villalon of the EU Court of Justice in Luxembourg, who said the measures “in principle” are in line with the bloc’s law.
“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,” Cruz Villalon said in a non-binding opinion today. Such advice is followed by the court in a majority of cases.
The opinion could ease pressure on ECB President Draghi days before
he meets with his Governing Council to consider a separate so-called quantitative-easing package to quell the threat of deflation in the euro area. Opponents of QE had raised legal concerns as one objection.
“This was definitely very good news for the ECB,” said Thomas Harjes, senior European economist at Barclays Plc (BARC) in Frankfurt. “We consider today’s opinion to be a green light for the ECB’s OMT and potential QE including government bonds and potential risk sharing in the event of a sovereign default or debt restructuring.”

‘Whatever it Takes’

The ECB in September 2012 announced details of the OMT plan as bets multiplied that the euro area would break apart and after Draghi’s promise to do “whatever it takes” to save the currency. The calming of financial markets that the still-untapped OMT program produced helped the euro area emerge from its longest-ever recession.
Germany’s own top court had expressed doubts about the legality of the OMT program, when it referred the case to the EU tribunal for guidance.
The opinion is an “important milestone,” the ECB said on its Twitter account. “OMT is ready and available.”
The euro weakened after the opinion was announced and traded at $1.1760 as of 9:33 a.m. London time, down 0.1 percent from yesterday.
The ECB is now fighting to stave off a deflationary spiral in the euro area after consumer prices fell on an annual basis last month. Policy makers remain divided on the need for quantitative easing, with German-led opposition claiming it increases taxpayer risk and undermines the incentive for governments to push through economic reforms.

Fresh Stimulus

Draghi signaled in an interview with Die Zeit published today that the ECB is ready to buy government bonds and is likely to announce fresh stimulus at its Jan. 22 meeting, warning that the euro area faces the threat of a deflationary spiral if the central bank doesn’t act.
“All members of the Governing Council of the ECB are determined to fulfill our mandate,” the ECB president told the German newspaper. “There are of course differences over how that should be done, but there aren’t endless possibilities.”
Government bond buying under QE would be part of fresh stimulus to be considered at the Governing Council’s Jan. 22 meeting. While Draghi says the deflation threat warrants action, the final decision is further complicated by Greek elections on Jan. 25, which could bring to power a party seeking to restructure the nation’s debt.

Direct Involvement

The OMT program is legal provided the ECB “refrains from any direct involvement in the financial assistance programs to which the OMT program is linked,” Cruz Villalon said, referring to the European Stability Mechanism and the European Financial Stability Facility, the euro area’s two rescue funds.
Other conditions include that “in the event of the program being implemented, the timing of its implementation is such as to permit the actual formation of a market price in respect of the government bonds.”
A 15-judge panel at the EU court is expected to give its final decision on the OMT case about four to six months after this week’s opinion.
While the EU court usually follows such opinions, the court has been at odds with its advocates general in some high-profile cases. These include a landmark ruling in May concerning Google Inc. (GOOGL) that gave citizens the right to be forgotten online. The U.K. lost a fight last January over EU short-selling rules even after an advocate general at the court had partly backed Britain’s stance.
The case is: C-62/14, Peter Gauweiler and Others.