In 2012, the European Central Bank introduced a debt “backstop” in its bond-buying scheme to try and secure the Euro in a volatile global economy. However, last week, Germany’s Federal Constitutional Court claimed that the emergency measure is not compatible with EU law.
The European Central Bank has not spent any money on the government bond-buying programme and “backstop” has yet to be used. Nevertheless, the action of implementing the measure was enough to invite recovery, providing the opportunity for the ECB to buy unlimited amounts of a country’s debt if investors left the market. This injected confidence in the European markets, leading to decreased borrowing costs in Italy and Spain and positive growth in other struggling economies, reducing their reliance on borrowing.
ECB President Mario Draghi brought in the emergency power as part of the Outright Monetary Transactions (OMT) programme. A ban on the bank funding governments is where Germany believes the breach has occurred, and the court stated that “There are important reasons to assume that it exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states.” If the “backstop” is restricted, however, it would conform to EU law.
The European Court of Justice has now become involved over the legality but it seems unlikely that it will block the emergency measure. The ECJ acts to resolve irregular legalities in the interests of the EU as a whole, rather than individual nations.
If the “backstop” were to be found illegal, it would harm the Eurozone and the Euro currency. This has been demonstrated by the Euro falling to a session low against the U.S dollar after the German court announced its discovery. Any ruling on the matter could take up to two years.
