Draghi Faces EU Court Ruling on 2012 Bond Plan as Greece Teeters

European Central Bank President Mario Draghi is counting on judges in Luxembourg to get a boost for a key part of his economic tool kit, just as Greece provides a reminder of why it was created.

The European Union Court of Justice will deliver a verdict Tuesday on the legality of a plan Draghi announced three years ago, when surging bond yields in stressed economies threatened to split the currency bloc. While a court adviser signaled in January that Draghi should prevail, a defeat would reverberate by also bringing into question his quantitative easing policy.

A contrary ruling “would have an enormous impact on markets,” Carsten Brzeski, ING Diba’s chief economist, said in an interview. “What we would see is probably again a sharp widening of spreads particularly in the peripheral countries.”

The Luxembourg-based court has been examining the Outright Monetary Transactions program after Germany’s own top court expressed doubts that the OMT may have gone beyond the ECB’s mandate and be seen as a form of monetary financing of governments, which EU treaties ban.

The ECB announced details of the OMT plan in September 2012 as bets multiplied that the euro area would break apart and after Draghi’s promise to do “whatever it takes” to save the currency. The calming of financial markets that the still-untapped OMT program produced helped the euro area emerge from its longest-ever recession.

Less than three years on, Greece is again edging toward an exit from the single currency as talks with creditors fail to unlock bailout funds.
Deflationary Scare

This time around, the ECB is in the midst of a separate bond-purchase plan that it started after a deflationary scare, and which has already become the object of a complaint in Germany.

“The implications for QE look to be limited” as long as the EU court backs the advice of advocate general Pedro Cruz Villalon, said Nick Kounis, an economist at ABN Amro Bank NV in Amsterdam.

While judges are free to deviate from the guidance of its advocates general, whose role is to deliver non-binding opinions on cases, they normally back them in their final rulings.

“The statement earlier in the year gave the ECB the green light,’ said Kounis. ‘‘If the judgment follows that statement, then I would not expect it to be a barrier.’’

Since the ECB started its 1.1 trillion-euro ($1.2 trillion) QE program three months ago, the inflation rate in the 19-nation euro area has turned positive, though it remains far short the ECB’s goal of just below 2 percent.

The improving economic performance comes despite uncertainty created by international creditor talks on Greece as the country flirts with default. Greece enters what could be a defining week after last-ditch negotiations between representatives of the Greek government and its creditors collapsed on Sunday.

The case is: C-62/14, Peter Gauweiler and Others.

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