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The Legality of European Central Bank's Sovereign Bond Purchases

Written by  Armin Steinbach

The European Central Bank’s (ECB) bond purchase program—possibly the most effective anti-crisis tool yet—is compatible with EU law. Both the European Court of Justice  (ECJ) and the German Federal Constitutional Court  (BVerfG) have recently found the European Stability Mechanism (ESM) to be lawful and have thus solved one of the most controversial issues surrounding EU crisis management in recent years. The legality of the ECB’s bond purchases has been challenged before the ECJ and the BVerfG in distinct proceedings. While the European Court of First Instance  has dismissed the action for annulment based on admissibility reasons, the BVerfG has, for the first time in history, referred the case to the ECJ. The ECJ will now rule on the program’s compatibility with EU law and then return the case to the German court. This Article argues that the ECB bond purchase program is compatible with EU law because it is founded on monetary policy. Furthermore, the ECJ is likely to exercise judicial restraint based on precedent, and the amount of discretion afforded to the ECB in pursuing its mandate.

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None of the instruments used to solve the debt crisis in recent years—bilateral loans, the European Financial Stability Facility (EFSF), or the ESM—have had as long lasting and as sustainable an effect on the European Union’s financial stability as the decision of the ECB Governing Council of September 6, 2012 to enter conditional bond purchases. The ECB’s Outright Monetary Transactions (OMT) program implies the ECB’s readiness to buy, without limitation, bonds of those countries that have subjected themselves to a credit line under the EFSF or ESM. The bond spreads of crisis countries have declined sharply and were not adversely affected by the turbulence surrounding the most recent rescue package for Cyprus demonstrating the OMT’s effectiveness as an anti-crisis tool. More than 5,000 applicants based in Germany filed a class action suit with the ECJ on November 11, 2012, aiming to annul the decision of the ECB Governing Council. The Court of First Instance dismissed the action as inadmissible because the claimants did not meet the restrictive conditions that require direct concern of the measures at stake. In the proceedings, the BVerfG, refrained from rendering a final judgment but expressed its view that the bond purchases might be in violation of EU law and referred the case to the ECJ because only the ECJ is permitted to rule on the compatibility of a measure with EU law. The BVerfG’s decision has launched a “ping-pong game” between the two courts: The ECJ will now have to address the legality of bond purchases in a preliminary ruling. Subsequently, the case will be returned to the BVerfG for the final judgment.

Read full article (PDF file 148 KB)