The European Court of Justice has delivered a ruling strengthening the European Central Bank's (ECB) hand in intervening in financial markets — backing that could come in handy amid fears Greece will default on its debts and possibly leave the 19-country euro currency union.
In a decision Tuesday in Luxembourg, the court upheld the ECB's 2012 offer to buy the bonds of countries whose governments face excessive market borrowing costs. The offer has helped reassure markets, even though no country has used it. High borrowing costs can push a country to need a bailout package of rescue loans, as happened with Greece, Portugal and Ireland.
The offer was challenged by a conservative German lawmaker and others who argue the ECB overstepped its legal powers and strayed into using its monetary powers to lend financial aid to governments.
The court disagreed, saying the bond-purchase offer “falls within monetary policy and within the powers” of the European system of central banks with the ECB at its head. Top ECB official Yves Mersch said the bank was “quite satisfied” with the ruling and said it confirmed the bank was “erring on the side of prudence” in using its powers.
The ECB, based in Frankfurt, Germany, serves as the chief monetary authority for the countries that use the euro, and has played a key role in fighting their crisis over high government debt. The bond purchase offer was part of ECB head Mario Draghi's 2012 promise to do “whatever it takes” to save the euro.
The bank has been constrained at times by a narrow legal mandate requiring it to fight inflation first, and only then look at stimulating growth and job creation. It has significantly expanded its role during the debt crisis, taking over banking supervision with the approval of EU governments and launching a broad program of monetary stimulus.
Christoph Schalast, professor of business and European law at the Frankfurt School of Finance & Management, said the decision bolstered the bank's legal freedom of action.
“It's a victory for the ECB, and it strengthens the discretionary powers of the ECB, which is very important in my view in the current crisis with Greece, that the ECB can `do whatever it takes,' to quote Draghi,” Schalast said.
Eurozone governments are in difficult talks with Greece over the conditions under which Athens would get more bailout loans. While the talks drag on, the central bank has kept the Greek banking system going by permitting banks to draw emergency central bank credit. It has also allowed the banks to lend a limited amount of money to the Greek government by purchasing short-term treasury bills.
The ECB's decisions to continue such support is crucial. Analysts believe Draghi wants to give elected leaders every opportunity to cut a deal. If they can't, however, the bank could be in the position of deciding whether to pull the plug on Greece's finances.
Analyst Tobias Ruhl at UniCredit Research said the ruling also buttresses the legal support for the ECB's current, separate program to pump 1.1 trillion euros of monetary stimulus into the economy through purchases of government and corporate bonds. The practice is known as quantitative easing, or QE.
He noted the decision placed no additional limits on what the bank can do in operating in financial markets, “providing legal tailwind to the QE program, as well.”