The most important instrument in the European Central Bank’s (ECB) crisis-fighting tool chest has been approved by the EU’s highest court, giving authorities the equipment they need to fight a potential financial crisis in Europe.
On Tuesday, June 16th, in a precedent setting decision, the EU’s highest court approved a sweeping monetary stimulus program from the European Central Bank. When European stocks were in freefall and bond yields were skyrocketing, the ECB stepped in to provide a backstop for the market. (Source: The Wall Street Journal, June 16, 2015.)
The program was considered successful by most observers, but a group of German politicians and scholars questioned whether the ECB overstepped its constitutional authority in helping finance its member states. Ultimately, they challenged the program’s legality in court.
The powerful German central bank, the Bundesbank, was also opposed to ECB intervention in markets. ECB President Mario Draghi countered by insisting that bond buying prevents deflation and promotes financial stability. As such, Draghi reasons that the ECB has a prerogative to undertake open-ended stimulus if necessary. (Source: The Wall Street Journal, June 14, 2015.)
The Storm That Passed
The decision is an important win for Draghi. The ECB now has the tools it needs to help fend off a potential financial crisis in Europe. Central bankers are now also shielded from legal attacks on their landmark 1.1 trillion euro quantitative easing program, which was unleashed earlier this year.
The program was developed in response to the sovereign debt crisis in 2011 and 2012. Bonds yields were reaching unsustainable rates in Greece, Ireland, Portugal, and Spain; threatening to push some of the world’s most advanced countries into bankruptcy.
The ECB stimulus is widely credited with resolving the crisis. Investor confidence rose when the ECB accepted its role as a “lender of last resort.” The greatest success of the program has been in preventing contagion from spreading through stressed European countries. Companies and shareholders with minimal relation to the debt-ridden countries were suffering as a result. But since 2012, panic over Greece’s solvency has not spread to other periphery states.
The Storm Yet to Come
The plaintiffs originally brought the case before German Constitutional Court, which was deeply skeptical of the ECB’s actions. The court took a narrow view of the central bank’s mandate but nonetheless referred the case to the European Court of Justice. (Source: The Wall Street Journal, June 16, 2015.)
Now that the preliminary opinion has been announced, the case is headed back to the German courts for a final review. Armed with the advice of the EU’s highest legal authority, German jurists will re-evaluate how the program corresponds to German law. But having crossed this crucial legal threshold means that the ECB is likely to continue supporting Europe’s financial markets. (Source: The Wall Street Journal, June 14, 2015.)