A European Central Bank bond-buying plan floated in 2012 would not break EU law subject to certain conditions, a top adviser to the European Union’s highest court said on Wednesday.
Pedro Cruz Villalon, advocate general at the court, said while the ECB was entitled to buy bonds and that the scheme outlined was “necessary” and “proportionate”, it would first have to spell out its justification and remove itself from any direct aid program to a eurozone member state.
That would make it difficult for the ECB to continue as a member of the troika of inspectors that supervises Greece and Cyprus with an emergency aid program if they were also to benefit from bond-buying.
“The Advocate General … considers that the OMT program 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 court said in a statement.
Although Wednesday’s opinion looks at a bond-buying blueprint from 2012, designed at the height of the crisis to avert a break-up of the euro, it could shape future QE (quantitative easing) to buy state bonds in order to avert deflation.
The adviser’s opinion is another milestone in a long-running dispute about printing money between the ECB and Germany, the largest member of the 19-country bloc.
The ECB is on the verge of announcing a scheme as soon as next week to buoy falling prices and put the struggling economy back on a steady footing.
The adviser fired a shot across the bows of the German Constitutional Court, which had referred the question to Europe’s top court, saying it was hard for courts to call the ECB into question as they had little expertise to do so.
“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, since they lack the expertise and experience which the ECB has in this area,” the statement said.
However, it may limit ECB President Mario Draghi’s room for maneuver as he tries to make good a promise to do ‘whatever it takes’ to save the euro.
Opponents of QE may seize upon the judgment that the OMT program was designed in a way that the ECB would not take on risk that could make it vulnerable to insolvency.
That could raise a question about an open-ended bond-buying program with new money and potential losses the ECB could suffer if those bonds were defaulted upon. One option being considered is for eurozone national central banks to do the bond-buying rather than the ECB.
The euro EUR= tumbled after the court opinion was published, as investors took the view that the ECB could push ahead with its plans without much constraint.
“”There is nothing in this ruling that blocks QE,” said Marc Ostwald, a strategist at ADM Investor Services International.