Europe court backs ECB bond-buying program

The possibility of full-scale quantitative easing (QE) by the European Central Bank (ECB) received a boost on Wednesday, when the top European Court backed a similar program "in principle."

The European Court of Justice (ECJ) on Wednesday said that the Outright Monetary Transactions (OMT) bond-buying program -- commonly seen as a predecessor to QE -- was compatible with treaty provisions and was in line with European Union law, as long as certain conditions are met.

The guidance came from Pedor Cruz Villalon, an advocate general at the court, who added that the ECB should not provide "direct" financial assistance to countries when making bond purchases, should not distort markets and would need to justify the use of such stimulus measures. It also stated that the ECB must have a "broad discretion when framing and implementing the EU's monetary policy."

VOLKSWAGEN LAW EU
Wolfgang Von Brauchitsch | Bloomberg | Getty Images

The opinion from the court is a non-binding judgement, but has added weight to the possibility of more stimulus in the euro zone. It comes ahead of the ECB's next policy meeting on January 22, when a number of analysts expect it to announce a full-scale QE program in an effort to bolster the region's struggling economy.

Europe shares trimmed losses slightly on Wednesday morning after the announcement, and the euro edged lower against the dollar. Yields on the long-dated government debt of nations like Spain, Italy and Ireland also pushed lower.

"(It) would seem to clear the path for the implementation of a full-blown quantitative easing program," Jonathan Loynes, chief European economist at Capital Economics, said in a note.

"Overall, then, the final hurdle to quantitative easing appears to have been cleared. But given the ECB's natural caution, Germany's objections and the limited effects of QE in other countries, it would be hopeful to expect it to transform the euro zone's economic outlook."

In September 2012, ECB chief Mario Draghi announced details of the OMT program, which would see the ECB buy the sovereign bonds of stricken euro zone members if they applied for aid. Germany previously opposed the OMT, saying it was beyond the ECB's remit of maintaining price levels in the euro zone.

ECB QE needs to do this to be successful
ECB QE needs to do this to be successful   

The program has not yet been used, but its possibility spread calm across European markets, with sovereign debt yields for struggling nations receding from their peaks during the crisis.

A number of German politicians were opposed to the OMT, arguing that German taxpayers were being asked to act as a backstop to other euro nations. In early February 2014, German judges passed the OMT case on to the ECJ to take into account the views of Luxembourg.

Nicholas Spiro, managing director at Spiro Sovereign Strategy, said he believes that Wednesday's announcement was just another example of the "politically driven restrictions and legal wing-clipping that characterize the conduct of monetary policy in the euro zone."

Plus, it prevents the implementation of an open-ended and unconditional asset purchase like that of the U.S Federal Reserve, according to Spiro.

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