LUXEMBOURG (Reuters) - The European Central Bank won crucial backing on Wednesday for its pledge to do whatever it takes to support the euro when a top EU legal adviser removed a hurdle to the bank’s plans to buy government bonds to bolster the euro zone economy.
Pedro Cruz Villalon, advocate general to the European Court of Justice, said a 2012 ECB bond-buying blueprint, designed at the height of the euro zone crisis to avert a break-up of the single currency and unused so far, did not break EU law.
The opinion was a clear rebuff to German critics of bond-buying, who argue the ECB would reward spendthrift states with cheap credit by printing fresh money and deter painful reforms.
“The OMT (Outright Monetary Transactions) programme ... falls within the monetary policy for which the (EU) Treaty makes the ECB responsible,” said Cruz Villalon, in an opinion which was met by enthusiasm on financial markets.
The euro EUR= tumbled to below its launch level for the first time in a decade after the court opinion was published, as investors took the view that the ECB had received a green light to push ahead with its plans.
The adviser’s opinion, which is usually followed by the court’s judges, was a milestone in a long-running dispute about printing money and the limits of central bank powers between the ECB and Germany, the largest member of the 19-country bloc.
It was a setback for those in Germany’s conservative financial establishment who want to stop ECB plans to print fresh money to buy government bonds and a boost for the Frankfurt-based central bank.
The German Finance Ministry welcomed the opinion, saying it provided clarity and upheld Berlin’s support for the programme.
Peter Gauweiler, a conservative Bavarian politician and co-initiator of the lawsuit, pointed to the adviser’s limitation on any ECB role in the troika of creditors that directed reforms in bailed out states such as Greece. But other critics were dismayed by the freedom the opinion gave the ECB to act.
“The ECB would turn into a bad bank,” said Hans Michelbach, a member of Chancellor Angela Merkel’s Bavarian sister party.
“This is the start of a transfer union by the back door,” he said, reflecting long-held fears that Germany could be forced to subsidise poorer states such as Greece or Portugal.
Germany’s influential Bundesbank, which testified against the OMT programme in the German constitutional court and is also hostile to ECB money printing, remained silent.
In the Frankfurt headquarters of the ECB, the feeling was one of vindication. Executive Board member Yves Mersch said the opinion showed that the bank had “considerable discretion” over policy.
Marcel Fratzscher, president of the Berlin-based German Institute for Economic Research, said the opinion was a victory for the ECB.
“Such a strong and overwhelming support for the ECB is surprising and could not have been expected,” he said. “I expect this recommendation to strengthen the position of the ECB and make a new ECB purchase programme of government debt more likely.”
The bank is on the verge of announcing a new scheme to buy euro zone government bonds known as quantitative easing, possibly as early as next week, to combat deflation and put the struggling economy back on a steady footing.
But it has yet to decide on crucial details of that plan, including whether it is limited or open-ended, whether risk is shared or remains with national central banks, and whether it covers all euro zone states or excludes those whose debt is rated below investment grade, such as Greece and Cyprus.
In his opinion, 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 judges 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,” a statement said.
European Court judges are due to deliver their ruling in the coming months.
Crucially, the advocate general cautioned against limiting the ECB’s room for manoeuvre, warning against the imposition of a cap on the amount of bonds the ECB could buy. That has important implications for its next move to print fresh money.
Setting such a limit “would seriously undermine the effects which the intervention on the secondary markets seeks to achieve, with the risk of triggering speculation”, he said.
He also expressed doubt about granting the ECB any seniority over other creditors in the event of a default — an issue of particular importance to investors whose support is needed for any ECB intervention to work.
“If the status of preferential creditor were granted to the ECB, that would call into question the position of other creditors,” he said in his written opinion.
One German critic of the ECB, Gunnar Beck, a legal expert at the University of London, said that if followed by the court, the opinion would make the central bank “untouchable”.
“This effectively grants the ECB and the crisis management of the euro zone an exemption from the law. It is a suspension of the rule of law in Europe,” he said.
Cruz Villalon did, however, set some conditions, warning against a potential conflict from the ECB’s continued role on the team of inspectors that manage countries in an emergency aid programme.
In a German newspaper, ECB President Mario Draghi meanwhile said a loose monetary policy is needed to achieve price stability in the euro zone and that its Governing Council is determined to deliver this — another clear signal that it was poised to act.
Nonetheless, he faces considerable political obstacles.
The Bundesbank and many of Garmany’s prominent economists believe it would seed euro zone governments with cheap finance, allowing them to avoid economic reform, with the risk that the bill ultimately lands on the German taxpayer.
Markets are expecting Draghi to finally deliver on a promise to do ‘whatever it takes’ to save the euro.
Germany’s Constitutional Court, asked to rule on complaints by a group of Eurosceptic politicians and lawyers, said last year there was good reason to believe the OMT plan broke rules forbidding the ECB from funding governments.
It referred the case to the European court for its view but implicitly reserved the right to give its final ruling. Wednesday’s opinion sets the two courts on a potential collision course.
Additional reporting by Tom Koerkemeier and Matthias Sobolewski and Michelle Martin in Berlin; editing by Mike Peacock, Paul Taylor and Giles Elgood