The preliminary ruling from the European Court of Justice on bond purchases in a crisis by the European Central Bank – so-called Outright Monetary Transactions – probably went as well for the ECB’s president, Mario Draghi, as he could have hoped, BBC reported.
How so? Well, the non-binding judgment said that such purchases would be legitimate, to bring down cripplingly high interest rates being paid by a member state in crisis, so long as the purchases take place on the market and not directly from the stricken government.
The judgment also said that the ECB must be allowed broad discretion in the setting and execution of monetary policy – because “courts lack the expertise and experience which the ECB has in this area”.
Broadly, therefore, the ECJ underwrote Draghi’s own understanding of his mandate – and to a great extent slapped down the German politicians and legal experts who were challenging the ECB’s right to make such bond purchases.
Economic Oomph
The ruling matters for two important reasons. First, it is not inconceivable that the eurozone could find itself, once again, in a full-throttled meltdown, if the Greek general election is seen by investors as a shortcut to Greece leaving the euro in a disorderly way.
Second, and much less hypothetically, the ruling should embolden the ECB to be more ambitious next week when embarking for the first time on the kind of quantitative easing – or purchases of government bonds – that since the 2008 financial debacle has been used as an important stimulus by the Bank of England, the US Federal Reserve and the Bank of Japan.
It is important to stress that QE and OMT have different objectives: OMT is about stabilizing money markets and bringing down borrowing costs when a country is imploding in a financial sense; QE is about trying to generate some inflation and economic oomph, when the pressures are deflationary and interest rates have already been cut to zero.
However the reasonable presumption would be that if the ECJ thinks purchases of public sector debt are acceptable for OMT, then QE is also permissible.
The big question, investors tell me, is whether the two Germans on the ECB’s governing council, Jens Weidmann and Sabine Lautenschlager, will now be persuaded to vote for QE, having hitherto opposed it.
Their assent is not necessary for QE to take place. But what investors want is a big and bold commitment to QE, rather than a timid, constrained trial – and it is thought that German assent is essential for an ambitious, substantial program of bond purchases.
