The European Central Bank (ECB) won a landmark case on Tuesday (11 December) as the European Court of Justice confirmed that the national bond-buying policy was in accordance with EU law, in response to concerns raised in Germany.
In March 2015, ECB president Mario Draghi launched a public sector asset purchase programme in secondary markets (PSPP). Under this programme, ECB buys public bonds on secondary markets to stimulate growth and counter deflation in the eurozone.
Several claimants in Germany questioned ECB’s policy, arguing that the programme goes far beyond the powers of the bank and has therefore failed to observe the division of competencies between the Union and its member states.
According to their complaint, the program infringed the prohibition of monetary financing of the member states as well, as it implies buying the sovereign debt of its own member states.
Germany’s federal court referred the case to the EU tribunal, which has now confirmed the programme is in line with EU law.
In line with EU law
ECJ’s ruling found that the program “does not exceed the ECB’s mandate” and that the program “falls within the area of monetary policy”, in respect of which the EU has exclusive competence for the member states whose currency is the euro, and observes the principle of proportionality.
The Luxembourg-based court recalled that since 2003, one of the ECB’s objectives is to maintain inflation rates at levels below, but close to, 2% over the medium term. As the PSPP program aimed at this goal, the policy did not exceed the Bank’s mandate.
Key interest rates were at their lower bound according to the court, and the ECB had already been implementing a programme of large-scale purchases of private sector assets for several months.
Therefore, the Court considered proven that there was no other instrument available to counter the risk of deflation.
The Court pointed out that although monetary policy measures may have effects on the real economy, they cannot be treated as equivalent.
“To exert an influence on inflation rates, the ESCB (European System of Central Banks) necessarily has to adopt measures that have certain effects on the real economy,” the court said.
Preventing the ECB from taking such measures, like buying bonds, might represent “an insurmountable obstacle” for the Bank to accomplish its tasks, “in particular in the context of an economic crisis entailing a risk of deflation.”
The top EU court did not find an infringement of the prohibition of monetary financing in the PSPP programme either, as the bank did not buy bonds directly from governments but on secondary markets.
“Implementation of that programme is not equivalent to a purchase of bonds on the primary markets,” the ECJ argued.
In particular, the Court considers that private operators cannot be sure when bonds issued by a member state they might purchase will actually be bought by the ECB in the foreseeable future.
Last October, the ECJ advocate general Melchior Wathelet presented his opinion previous to the ruling.
One of the most political arguments against Draghi’s programme, especially prominent in Germany, was its alleged negative impact on member states’ willingness to follow a robust budgetary policy.
Wathelet strongly opposed this argument, insisting that the programme’s purchases were distributed in accordance with a criterion separated from the countries’ economic situation.
“The PSPP cannot be interpreted as a mechanism that might assist the member states which are in financial difficulty,” he insisted.
ECJ’s ruling was in line with this opinion as the Court considered the national bond-buying programme “does not reduce the impetus of the member states to follow a sound budgetary policy.”
Although the programme was initially foreseen to end in September 2016, it was extended and might end over the next few weeks.