Mario Draghi won a legal endorsement for the bond-buying plan he designed to save the euro, potentially easing resistance to a similar program that could be announced as soon as this month.

The Outright Monetary Transactions program that the European Central Bank president pushed through in 2012 won the conditional backing of Advocate General Pedro Cruz Villalon of the EU Court of Justice in Luxembourg, who said the measures are “in principle” in line with the bloc’s law.

“The ECB must have a broad discretion when framing and implementing the EU’s monetary policy, and the courts must exercise a considerable degree of caution when reviewing the ECB’s activity,” Cruz Villalon said in a non-binding opinion today. Such advice is followed by the court in a majority of cases.

The opinion could ease pressure on ECB President Draghi days before he meets with his Governing Council to consider a separate so-called quantitative-easing package to quell the threat of deflation in the euro area. Opponents of QE had raised legal concerns as one objection.

“This was definitely very good news for the ECB,” said Thomas Harjes, senior European economist at Barclays Plc (BARC) in Frankfurt. “We consider today’s opinion to be a green light for the ECB’s OMT and potential QE including government bonds and potential risk sharing in the event of a sovereign default or debt restructuring.”

The ECB in September 2012 announced details of the OMT plan 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.

David Fuller's view

Presumably, Germany’s Bundesbank president Jens Weidmann will be seething over this ruling by Pedro Cruz Villalon of the EU Court of Justice, but he appears to have been outflanked by ECB President Mario Draghi.

Whatever one thinks about the merits of QE, let along the merits or otherwise of the European single currency, the ruling described above certainly increases the likelihood that Mario Draghi will have the upper hand as he soon meets with his Governing Council over the terms of his QE programme.

Eurozone economic problems have long been a worry for investors, and not just those within Europe.  Recently, there has been considerable anxiety about the outcome of the impasse between Draghi and the Bundesbank.  Had Draghi lost the EU Court of Justice ruling, effectively tying his hands when meeting with the ECB Governing Council on 22^nd January, there was a possibility that he would have felt forced to resign from the ECB in frustration.  That would have increased uncertainty, compounding the current nervousness experienced by stock markets.  That risk appears to have passed, at least for the medium term.  If so, Draghi’s 1 trillion Euro QE programme to “do whatever it takes” is presumably back on track.  This stimulus would take the ECB Balance Sheet back towards its highs, cushioning downside risk for most European stock markets in the process.   

See also December 16^th 2014 article: Bundesbank President Weidmann Rejects Sovereign QE With No Deflation Seen.