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CJEU: European Central Bank's bond-buying programme is legal

The European System of Central Banks (ESCB) can legally buy sovereign bonds from secondary market operators in struggling Eurozone countries, in order to stimulate the European economy, the Court of Justice of the European Union has said17 Jun 2015

The European Central Bank (ECB) announced the outright monetary transactions (OMT) programme for the ESCB in 2012, but has never put it into practice, the CJEU said.

The aim of the programme was to address increases in the price of government bonds at the time. The ECB felt that the increases were caused by more than just macroeconomic differences between states, but by excessive risk premiums demanded by some member states, the court said.

The premiums were intended to guard against the risk of the break-up of the euro area, the CJEU said. However, the situation undermined the ESCB's monetary policy transmission mechanism by creating a fragmented market with differing conditions and credit costs. That, in turn, made it more difficult for the ESCB to influence prices through 'impulses' that it sends out across the money market.

The programme would allow the ESCB to buy bonds from secondary market operators, meaning from non-government sources, in eurozone states that had applied for help and committed to structural reform through the European Financial Stability Facility or the European Stability Mechanism.

The German Bundersverfassungsgericht (Federal Constitutional Court) had asked the CJEU to rule on the legality of the programme, after a number of actions were brought before it.

The CJEU ruled that the programme falls within monetary policy and therefore within the powers of the ESCB.

Merely making its announcement on the OMT programme was enough to achieve the ECB's aim, which was to restore the monetary policy transmission mechanism and the singleness of monetary policy, the CJEU said.

"More than two years after that announcement, the programme has still not been activated," it said.

The existence of the proposed programme helps to ensure that monetary policy remains 'single', which it must do under EU treaties, the court said.

In aiming to protect an 'appropriate monetary policy transmission', the programme also  contributes to the primary objective of monetary policy, which is to maintain price stability, the CJEU said.

Advocate general Cruz Villalón reached a similar conclusion on the programme in January, saying that the proposals were "compatible in principle" with EU law.