Plan to Buy Troubled|EU Bonds Upheld

     LUXEMBOURG (CN) – Echoing an adviser’s recommendation, the EU’s highest court on Tuesday upheld the European Central Bank’s plan to buy troubled government bonds.
     The ECB announced the plan, known as the OMT program, at the height of the financial crisis in 2012, but the program’s implementation is not possible without the adoption of certain legal acts.
     Political leaders and economists in Germany sued their own government, the Deutscher Bundestag, over its failure to challenge the ECB’s plan, claiming that the Bundestag’s failure to act violated their fundamental rights. The parliamentary group Die Linke meanwhile asked the German constitutional court to have lawmakers work on annulling the ECB’s plan.
     For the first time in its history, the highly independent German court asked the European Court of Justice to weigh in on the legality of the program. Specifically, it questioned whether the plan is an economic policy measure rather than a monetary one, therefore exceeding the scope of the ECB’s powers under the EU constitution.
     The ECB acknowledges that the program is an “unconventional” instrument – and risky – but argued that it falls within the bank’s constitutional mandate. It argued that the plan would restore the efficiency of its monetary policy instruments by lowering the interest rates on member state bonds, thereby stabilizing Europe’s financial situation in the event of a fiscal crisis.
     But while both the groups challenging the plan and the German court believe the OMT program would make the ECB a “lender of last resort” in the euro area, Advocate General Pedro Cruz Villalon recommended in January that the European Court of Justice uphold the program, based on the ECB’s broad discretion to implement EU monetary policy.
     The court found the program compatible with EU law Tuesday.
     “In this respect, the draft decision and draft guideline produced by the ECB in these proceedings indicate that the Governing Council is to be responsible for deciding on the scope, the start, the continuation and the suspension of the intervention on the secondary market envisaged by such a programme,” the decision states. “The ECB has also made clear before the court that the ESCB [European System of Centra Banks] intends, first, to ensure that a minimum period is observed between the issue of a security on the primary market and its purchase on the secondary market and, secondly, to refrain from making any prior announcement concerning either its decision to carry out such purchases or the volume of purchases envisaged.
     “Inasmuch as those safeguards prevent the conditions of issue of government bonds from being distorted by the certainty that those bonds will be purchased by the ESCB after their issue, they ensure that implementation of a programme such as that announced in the press release will not, in practice, have an effect equivalent to that of a direct purchase of government bonds from public authorities and bodies of the member states.”

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