Court rules on bond-buying

An adviser to Europe's top court said Wednesday the European Central Bank's planned bond-buying program, known as quantitative easing, did not break the law.

Advocate General Pedro Cruz Villalon had been tasked by the European Court of Justice to determine whether the broad scheme to buy government bonds was legitimate and in line with monetary policy.

Villalon recommended how the court should rule on the ECB's plans for printing money to reinvigorate the flagging eurozone economy. Although his opinion was non-binding, the court typically follows the counsel of its advisers. A final ruling by a 15-judge panel is expected in the next six months.

The ECB's bond-buying plans fall under its so-called Outright Monetary Transactions (OMT) program. The bank's president, Mario Draghi, has said his institution would do "whatever it takes" to prop up the euro and stave off deflation.

Limited options

Those three words - "whatever it takes" - are widely credited with having prevented the eurozone economy from falling into further malaise because people understood them as a promise of unlimited support for the common currency.

Draghi admitted in an interview with a German newspaper on Wednesday that the bank's options were limited when it came to shoring up the eurozone economy and fending off a deflationary spiral.

"All members of the ECB's governing council are determined to fulfill our mandate," Draghi told Germany's Die Zeit weekly. "Of course there are differences about how we can do that. But it's not as if we have an endless amount of possibilities."

The central bank is gearing up for its next policy meeting on January 22. Chances are good it will announce bold plans to buy billions of euros worth of government bonds, thereby flooding the eurozone with newly created money.

What the court omitted

But therein lies the discord. The mere mention of this form of stimulus has drawn unusually sharp criticism from Germany, where economists and politicians asked the country's constitutional court to review the bond-buying scheme a year ago.

"The bond-buying program OMT...took pressure off some countries to reform. It's apparent in Italy," Commerzbank's chief economist, Jörg Krämer, told DW. "Those are the negative consequences of that sort of policy."

Germany's top judges ruled that large-scale bond purchasing by the ECB was likely in violation of laws preventing it from funding governments, but they deferred to the European court for its view.

Specifically, they were looking for suggestions for a specific approach the bank could take when implementing quantitative easing.

As the European Court of Justice released its lawyer's opinion, experts highlighted the fact that it failed to advocate one approach over another.

"The ECJ had many opportunities to stick out its neck and develop some models," said Bert van Roosebeke from the Center for European Policy. "The court's adviser left all of that out and now it's for the ECB to develop a model that convinces the ECJ."

Krämer called the ECJ's opinion "carte blanche" for the ECB to choose how it wanted to implement its stimulus policies.

Germany's Bundesbank and many of the country's prominent economists, including Sabine Lautenschläger, a top ECB official, contend that bond purchases would give weaker countries an excuse to delay politically difficult reforms. That's because as the cost of public borrowing falls, governments are less inclined to prove to markets that they are worth investing in.

cjc/sgb (Reuters, AP, AFP, dpa)