The European Court of Justice holds a first hearing on the legality of the European Central Bank’s Outright Monetary Transactions programme. There won’t be anything definitive today but it serves to rekindle debate about the limits of the ECB’s powers.
In February, the German Constitutional Court asked the European Court to rule on the legality of OMT, the mechanism that drew a line under the euro zone crisis when it was unveiled in 2012. The court may give guidance about how best to make a final ruling which is expected in late spring next year.
The scheme has never been deployed because the mere threat of action prompted government borrowing costs to tumble to record lows. Now, the debate is centred on whether the central bank should start printing money to ward off a deflationary downward spiral.
If its bond-buying scheme was thrown out by the EU court, or German participation rejected by Germany’s constitutional court – something most legal experts think is unlikely – it would put a serious crack in the edifice and perhaps prompt markets to start testing the euro zone’s defences once again.
It’s also possible that elements of any ruling could directly call into question the legitimacy of the ECB embarking on a quantitative easing programme. A legal challenge from some in Germany would seem likely if the ECB ever did go down that road.