On September 6, 2012, European Central Bank (ECB) President Mario Draghi announced a bond-buying program in an attempt to lower the borrowing costs of struggling Eurozone countries (e.g., Spain and Italy) and to prevent the potentially worst-case scenario of a currency breakup. The program, called Outright Monetary Transactions (OMT), targeted government bonds with maturities of one to three years and longer-dated debt with a remaining maturity of that length. Draghi emphasized that the ECB would not have seniority status on the debt and purchases would be fully sterilized, meaning a neutral impact on the overall money supply.
A group of university professors and about 30,000 disgruntled German citizens opposed using German funds, alleged that the ECB’s OMT program violates the European Union treaty prohibiting direct financing of national governments by the ECB, and filed suit. On October 14, 2014, the Court of Justice of the European Union, Europe’s highest court, listened to oral arguments from both parties.
Dietrich Murswiek, the lawyer for one of the plaintiffs, argued that the ECB sought approval for “an egregious extension of its powers” and that the program could cost billions of euros to member countries.
Ulrich Häde, the lawyer representing the German government, warned that although the ECB does have discretion in its bond-buying program, it must not violate the European Union treaty prohibiting monetary public finance. Häde further argued that the announcement of the program was enough to tame financial markets. For example, during Draghi’s announcement, Spain’s two-year government bond yield dropped to a five-month low of 2.97 percent and Italy’s two-year government bond yield fell 13 basis points to 2.32 percent. The ECB does not actually need to buy any bonds as part of its program. Many Germans feared that they would bear the economic burden if the ECB purchased government bonds that would later default from Eurozone countries.
Hans-Georg Kamann, counsel for the ECB, argued that the end of the Eurozone threatened to be an uncontrolled self-fulfilling prophecy. Thus, the ECB bond-buying program did not risk a violation of the European Union’s monetary policy mandate, was not a form of economic policy overreach, and was necessary and an appropriate reaction to the 2012 crisis. Lawyers from Ireland, Italy, Poland, and Spain, among other nations, also made arguments in support of the program.
The Court of Justice is not expected to reach a decision until mid-2015. However, analysts predict that severe restrictions were unlikely to be placed on the ECB’s bond-buying program.
Legality of ECB’s Bond-Buying Program: Does the Limit Exist (PDF)