ECB Wins EU Top Court Fight Over Legality of QE Program

(Bloomberg) -- The European Central Bank didn’t overstep its mandate by setting up a quantitative-easing program to stave off deflation, judges at the European Union’s top court ruled.

The ECB’s bond purchasing program is in line with the law, the EU Court of Justice said, dismissing the latest in a series of challenges from critics who argue the tool deployed by ECB President Mario Draghi clashes with a ban on so-called monetary financing.

“It does not exceed the ECB’s mandate and does not contravene the prohibition of monetary financing,” the court said in its binding decision on Tuesday in Luxembourg.

The ruling clears the way for the Governing Council to keep its stimulus in place and support euro-area economy amid flagging growth momentum. While the Governing Council is expected on Thursday to decide that net asset purchases will cease at the end of December, policy makers have planned to reinvest proceeds from maturing bonds for an extended period of time afterwards.

The euro area’s central bank began large-scale asset purchases in March 2015 -- more than six years after the U.S. Federal Reserve started its first program. Germany’s Bundesbank was outspoken against the measure even before it began, arguing that it reduces incentives for governments to make their economies more competitive.

The ECB has accumulated 2.6 trillion euros ($3 trillion) in assets since the program started. The institution “takes note” of the ruling that confirmed the program is a monetary-policy measure and doesn’t violate the EU law, an ECB spokesperson said on Tuesday.

Germany’s Federal Constitutional Court last year sought the EU judges’ guidance in a series of challenges to the ECB measure by opponents who told the EU tribunal at a packed hearing in July that the institution had engaged in “opaque and omnipotent activities.”

The case is almost a carbon copy of a previous dispute in which German judges asked the EU top court’s guidance on a challenge to the ECB’s Outright Monetary Transactions program. EU judges cleared the program with minor strings attached and the German tribunal reluctantly followed that direction in its final judgment. Most of the plaintiffs in the QE cases were in the group that sued against the OMT.

Quantitative easing is different from OMT, a program that was announced in 2012 and never used. In the case of OMT, the ECB can start buying government bonds of a euro-area member state only after the country turns for financial assistance and meets its conditions.

The Karlsruhe, Germany-based tribunal last year decided that there are “grave reasons to hold that the motions underlying the bond-buying program violate the ban on monetary financing of states and overstep the mandate of the European Central Bank and thus transgress the powers of the member states.”

The case is: C-493/18, Heinrich Weiss and Others.

--With assistance from Zoe Schneeweiss.

To contact the reporter on this story: Stephanie Bodoni in Luxembourg at sbodoni@bloomberg.net

To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Peter Chapman, Piotr Skolimowski

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