EU Court’s green light for QE

The opinion underlies the Treaty prohibition imposed on the ECB for public financing, thus ruling out buying bonds in the primary market. Yet, it considers purchases in the secondary market as failing to fall under such proscription.
Furthermore, any unconventional monetary measure should remain carefully split from economic support schemes. Thus, ECB’s participation in the so-called troika scheme for monitoring countries in difficulties should immediately cease.
The Advocate General also requires the ECB to fully explaining the reasons for adopting a bond-buying programme, “identifying clearly and precisely the extraordinary circumstances that justify the measures”. In this respect, it considers the OMT a suitable tool for bringing back stability to interest rates on public bonds, even if it hardly includes any details of the reasons behind this action.
Finally, it recalls that any extraordinary measure should fully respect the necessity and proportionality principles.
This opinion provides enough clues to the ECB for launching a safe QE. It should provide a convincing explanation on why it implements a bond-buying scheme. That shouldn’t prove too difficult as deflationary dangers loom ahead.
Yet, linking the programme to the goal of bringing inflation within its medium term target would deprive the ECB the means of launching a huge open-ended scheme. Most probably, it will either being forced to set monthly amounts until price recover themselves or fix a rather modest overall target. In both cases, the boasted one trillion increase in its balance sheet will fall into oblivion.
In these circumstances, it is likely the ECB will chose to set a monthly target rolled-over as long as inflation and growth prospects fall behind their goal. That would provide an open-ended stimulus for raising confidence. The option of a moderate fixed amount would prove difficult to justify and unlikely to raise spirits.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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