E.C.B.’s Bond-Buying Program Is Legal, Adviser to Appeals Court Says
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Version 0 of 1. BRUSSELS — An adviser to Europe’s highest appeals court on Wednesday broadly endorsed the authority of the European Central Bank to buy unlimited quantities of eurozone countries’ bonds to stabilize their economies during a crisis. The preliminary ruling represented a victory for Mario Draghi, the president of the central bank, as he considers a major round of stimulus. The opinion involved a bond-buying program that Mr. Draghi outlined in 2012, although he has yet to deploy it. The bank is expected to soon unveil plans for an even broader program of large-scale buying of government debt, or so-called quantitative easing, and the decision could diminish the potential legal hurdles to the plan. Many economists have long advocated that the European Central Bank begin a quantitative easing program as a way to stimulate growth in the eurozone. The United States and Britain have used such methods to bolster their economies. On the expectation that Mr. Draghi will announce such a plan when the central bank meets next week in Frankfurt, investors on Wednesday bid up eurozone bonds. German 10-year government bonds rose, driving their yields, which move in the opposition direction of their prices, to a record low of 0.424 percent. The yields on bonds of five other eurozone members — Austria, Belgium, Finland, France and the Netherlands — also reached new lows, only slightly higher than Germany’s. The euro, which would be relatively less attractive if the central bank pumped many more of them into the market through a bond-buying program, continued its fall of recent weeks, dropping on Wednesday to a $1.18, its lowest level since the end of 2005. The preliminary ruling was made by one of the advocates general at the Court of Justice of the European Union in Luxembourg, Pedro Cruz Villalón, who said that the bond-buying plan Mr. Draghi proposed in 2012 was “compatible” with European Union treaties. Mr. Cruz Villalón wrote that the program would be “suitable for bringing about a reduction in the interest rates on government bonds” and said the central bank would not be assuming “a risk that will necessarily make it vulnerable to insolvency.” But he also warned that the central bank should “proceed with particular caution” when buying government bonds, to avoid creating speculative behavior in the market. Judges at the Court of Justice endorse the advice of their advocates general in a majority of cases, although their decisions typically come months later. For now, though, the ruling seems to validate the broader powers that the European Central Bank has taken on, and aspires to, under Mr. Draghi, who became its president in late 2011. Besides seeking the ability to take potentially powerful steps to stimulate the economy, the central bank has taken on chief oversight of the eurozone’s biggest banks — a regulatory role that was previously parceled out among member states. Mr. Cruz Villalón did not suggest any explicit limits on the size of the central bank’s bond buying. Nor did he say that the European Central Bank should have priority over other bondholders if a debtor defaulted, a point that is likely to be viewed favorably by the central bank. If the central bank were a so-called senior bondholder, private investors might have been reluctant to buy the bonds. That, in turn, could undercut the aim of the bond-buying program, which is to create more demand and push down market interest rates. The opinion did warn the German constitutional court, which had referred the case to the Court of Justice, against meddling too much with European Central Bank policy. “The courts must exercise a considerable degree of caution when reviewing the E.C.B.’s activity, since they lack the expertise and experience which the E.C.B. has in this area,” it said. The opinion did, however, admonish the European Central Bank to better explain the rationale behind its policies. It also said the central bank should not buy government bonds immediately after they are issued, but should wait to allow markets to determine a price. The bond-buying program that the court was assessing is one that Mr. Draghi announced at the height of the European sovereign debt crisis as part of his effort to do “whatever it takes” to save the euro. The program, called Outright Monetary Transactions, has never been deployed. But its mere announcement is widely credited with helping to rescue the currency by calming market forces that were pushing bond rates in Italy and Spain to dangerously high levels. The program drew consternation from a group of German lawyers and academics, who sued at their country’s constitutional court. They argued that the program opened the way to sharing the debt of member states in danger of defaulting. The German court then referred the case to the top European court for further guidance. Yves Mersch, a member of the executive board of the European Central Bank, called the opinion announced on Wednesday “an important milestone.” “We have always been convinced” that the bond-buying program at issue is “legally sound and in line with our mandate,” Mr. Mersch said in a statement. Jonathan Loynes, the chief European economist at Capital Economics in London, wrote in a research note that the ruling “would seem to clear the path for the implementation of a full-blown quantitative easing” at the bank’s policy meeting on Jan. 22. Some elements of the opinion could affect the way the program intended to help individual distressed economies would operate, but “there seems little here to prevent a Q.E. program aimed at loosening monetary policy across the eurozone as a whole,” Mr. Loynes wrote, referring to quantitative easing. Even though the adviser effectively said an expanded program could go ahead, Mr. Draghi still faces challenges from the central bank’s “natural caution” and from Germany’s objections, Mr. Loynes wrote. Many Germans fear that they will be stuck with the bill if eurozone countries like Greece or Italy are unable to pay their debts. Proponents of quantitative easing are concerned that limits on the program could undercut its psychological impact on financial markets by raising doubts about how far the central bank would be able to go to restore inflation. Consumer prices fell at an annual rate of 0.2 percent in December, according to an official estimate, raising concerns that the eurozone could sink into deflation, an economic condition where people delay purchases because they expect prices to fall further. Deflation eventually undermines company profits and leads to higher unemployment. The central bank’s official target for inflation is below, but close to, 2 percent. The core inflation rate, which excludes energy and food prices, ticked up to 0.8 percent in December from 0.7 percent the month before. While low inflation is good for consumers in the short term, it can make it difficult for companies to earn a profit and eventually force them to cut wages or dismiss workers. In addition, low inflation is bad for borrowers because it raises the effective interest rate they must pay. The program at issue in the lawsuit was intended to protect eurozone countries whose borrowing costs were being pushed higher by market panic. Quantitative easing has a different purpose — to generate inflation — and would probably involve purchases of bonds issued by all eurozone governments, rather than just those in crisis. |