Brussels, 14/01/2015 (Agence Europe) - The European Central Bank's outright monetary transactions (OMT) programme provides for the purchase of bonds of eurozone member states which are receiving financial assistance, is compatible, in principle, with the Treaty on the Functioning of the European Union (TFEU), concluded the Advocate General to the Court of Justice of the EU on Wednesday 14 January (case C-62/14).
Pedro Cruz Villalon found the programme to be appropriate, necessary and proportionate with regard to the objectives pursued by the bank. However, he said that, in the event the programme is implemented and so that it retains its character of a monetary policy measure, the bank should refrain from any direct involvement in the financial assistance programme that applies to the state concerned and give a proper account of the reasons for adopting an unconventional measure, such as the OMT programme, identifying clearly and precisely the extraordinary circumstances that justify the measure.
The OMT programme, the key points of which were announced by the ECB in September 2012, has never been applied but was held up by the bank as a way of reducing interest rates during the sovereign debt crisis. It allows for the purchase of sovereign bonds on the secondary market, subject to certain conditions: - the states concerned must be under a European Financial Stability Facility (EFSF) or European Stability Mechanism (ESM) financial assistance programme which may, in this context, buy the debt on the primary market; - buyback operations must focus on the shortest end of the yield curve; - no ex ante quantitative limit must be set; - the ECB must be given the same treatment as private creditors; - the ECB must pledge to completely detoxify the liquidity generated.
The German Constitutional Court in Karlsruhe, for the first time in its history, asked the Court of Justice as to the legality of the programme and whether the ECB was not overstepping its mandate. It asked inter alia: - whether the OMT programme constituted an unconventional monetary policy measure, as claimed by the ECB, or rather an economic policy measure outside the bank mandate; - whether the programme complies with the prohibition on directly financing member states (Article 123 of the TFEU) (for the other objections raised by the German court, see EUROPE 11229).
The Advocate General concluded that the programme was legal, with certain provisos with regard to possible implementation arrangements. As premises to his opinion, he says that the ECB must have broad discretion when framing and implementing the EU's monetary policy and the courts must exercise considerable caution when reviewing the ECB's activity, not having the same degree of expertise and experience.
In response to the first question put, Cruz Villalon concluded that the OMT programme is an unconventional monetary policy measure in that the objectives it pursues are legitimate and compatible with that policy. In particular, he is of the view that the programme is suitable for bringing about a reduction in the interest rates on the sovereign debt and is necessary and proportionate in the strict sense, since the ECB does not assume a risk that will necessarily make it vulnerable to insolvency. However, in the event of the OMT programme's being activated, in order to ensure it remain within the strict framework of monetary policy, the ECB will have to refrain from any direct involvement in the financial assistance programme that applies to the state concerned. It will also have to set out clearly the circumstances justifying the measure both in legal act which gives it form and its implementation (no such justification is to be found in the press release of 6 September 2012).
On the issue of the prohibition on the ECB from involvement in direct monetary financing of a country, the Advocate General notes that the Treaty does not preclude ECB intervention on the secondary market but requires that it do so with sufficient safeguards to ensure that its intervention does not infringe the prohibition of monetary financing. So that the OMT remains compatible with the Treaty, the bank should proceed with particular caution when intervening on the secondary market, in order to prevent speculative purchase of debt bonds on the primary market. In implementing the OMT programme, it should also ensure that the timing of its implementation is such that it permits the actual formation of a market price (a purchase on the secondary market a few instants after the issue of the bonds on the primary market could destroy the distinction between the two markets).
The chairman of the European Parliament economic affairs committee, Roberto Gualtieri (S&D, Italy) welcomed the opinion, saying it is in line with the Parliament position of March on the troika action in the eurozone countries receiving financial assistance.
The ruling on this case is expected in the coming months. The most likely course of events is that the judges go along with the Advocate General's opinion. Any disagreement, even partial, could renew market speculation. It is not to be ruled out, however, that the German judges pursue their action, declaring that the OMT programme infringes the German constitution and, potentially, not allowing the Bundesbank to take part. (FG)