BONDS RULE License with Limits

A preliminary ruling by the European Court of Justice could clear the way for controversial government bond buying.

If the European Court of Justice confirms the opinion of its advocate general, Mario Draghi can breathe easier.

The ruling would allow the European Central Bank (ECB) president to buy government bonds on secondary markets in huge amounts to promote the goals of his euro zone monetary policy.

The European Union’s top court is expected to issue a full ruling later this year, but usually follows the advice of its advocate general.

According to the preliminary ruling, courts in countries such as Germany could not evaluate the impact of ECB instruments on controlling money supply in individual situations.

It is highly probable that the ECB would be compelled to leave the troika.

In this point, the judicial opinion is a clear rejection of arguments by the German constitutional court. Before submitting the case to their counterparts in Luxembourg, the German constitutional judges turned their attention to “Outright Monetary Transactions” (OMT), a 2012 bond-buying program that never was actually put to use.

This is what the advocate general ruled on, basically affirming that the ECB has the right to buy government bonds under European treaties.

But the advocate general’s preliminary ruling established a limit on fiscal and economic policy that is more distinct than expected.

It is still open to question whether ECB bond buying would be allowed under stipulations that the euro rescue package placed on countries that received emergency aid. Programs such as this safety net are political in nature, and do not fall under the jurisdiction of the ECB.

Germans should be able to live with a verdict issued along these lines.

The German federal government and central bank continue to insist that the ECB must leave the so-called troika of euro zone creditors only in case that it initiates the OMT program. This interpretation is in no way clear on the basis of the ruling.

On the contrary, it is highly probable that the ECB would be compelled to leave the body that also includes the European Commission and International Monetary Fund in overseeing the situation in Greece and other crisis countries.

Such an outcome would be welcomed by European central bankers. Mr. Draghi has clearly said that he prefers to leave safety net policies to governmental prerogative.

This also makes things less comfortable for individual governments: In the next crisis, they would have to engage in more vigorous rescue measures and justify their actions to voters.

The most grievous danger seems to have been avoided – namely that the German constitutional court would contradict a ruling by the European Court of Justice and prohibit the German Bundesbank from participating in the government bond buying.

The European Court of Justice lays out limits to financing governments through monetary policy just as clearly as the German court in Karlsruhe does. Germans should be able to live with a verdict issued along these lines.


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