European Court of Justice called in over ECB’s bond-buying plan

European Court of Justice called in over ECB’s bond-buying planbigstock-European-Currency-Symbol-5475739.resized

In 2012 the European Central Bank introduced a debt “backstop” in their 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 simply 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 solve irregular legalities in the interests of the EU as a whole, and not individual nations.

If the “backstop” were to be found illegal, it would have a negative impact on 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.