ECB's bond-buying plan referred to Europe's top court

A hearing at Germany's Constitutional Court The court says the bond-buying scheme is "incompatible" with EU law

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An emergency measure that was credited with stabilising the euro has been referred to Europe's top court.

On Friday, Germany's constitutional court said that the European Central Bank's (ECB) bond-buying scheme could be "incompatible" with EU law.

The European Court of Justice will now decide the legality of the so-called debt "backstop", introduced in 2012.

Although the ECB has not used the emergency power, its existence calmed turmoil in European financial markets.

When he announced the Outright Monetary Transactions (OMT) programme, ECB President Mario Draghi said he would do "whatever it takes" to save the single currency.

But the German court has said there was good reason to think the OMT violated a ban on the bank funding governments.

In a statement, the court added: "There are important reasons to assume that it exceeds the European Central Bank's monetary policy mandate and thus infringes the powers of the member states."

Euro stability

However, the court also said it "considers it possible that if the OMT decision were interpreted restrictively" it could conform with EU law.

Analysis

The ECB has not spent a single euro on the government bond-buying programme announced in 2012. And yet the mere fact that it declared itself willing to act put an end to the turmoil in European financial markets, laying a foundation for a recovery of sorts in the wider economy.

Borrowing costs fell sharply for the eurozone countries in financial stress - notably Italy and Spain. In the meantime, some of the struggling economies have started to grow again and they have made progress in reducing their borrowing needs, so the need for the ECB's backstop has, perhaps, diminished a little.

And the European Court of Justice is seen as less likely to rule against the ECB. The German Court has raised some important questions and created new uncertainty about the response to the crisis. But, in practice, the impact would have been much greater had it come sooner, or not involved a referral to the EU's top judges.

Even though the OMT has not yet been used, confidence was restored to the markets at the suggestion that the ECB could buy unlimited amounts of a country's debt if investors pulled out.

If it were declared illegal, there could be big implications for the bloc and its single currency.

The euro fell to a session low against the dollar in response to the court's finding.

Block unlikely

However, it's thought unlikely the European Court of Justice (ECJ) will block the OMT policy.

"The (OMT's) chances are better in Luxembourg than in Karlsruhe," said Bert Van Rossebeke, from the Centre for European Politics in Freiburg.

Gunnar Beck, a European law expert at the University of London, said it would be unusual for the ECJ to obstruct a large, bloc-wide measure.

"Practically speaking, the court is not an independent organisation but is pre-disposed to interpret legal questions in the interest of the European Union," he added.

"The court of justice doesn't take account of national sensibilities... There is no doubt of the outcome now."

Analysts say it could take the ECJ up to two years to rule on the OMT programme.

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