Draghi tests legal limits again with claim of quantitative easing flexibility

Bloomberg

Mario Draghi is once again testing the boundaries of the law in his efforts to lift the euro zone out of its economic malaise.
When the European Central Bank president promised last week to add monetary stimulus if the outlook doesn’t improve, he said one option is to resume large-scale purchases of government bonds. He also said self-imposed limits on how much debt the institution can buy could be raised.
That raises a potential legal hurdle, as those limits were designed to ensure the ECB doesn’t fall foul of European Union law that forbids printing money to fund governments. While the EU’s top court has said quantitative easing is legal, judges in Germany — which is critical for the success of QE as the biggest buyer of debt under the program — haven’t yet issued a final ruling on a challenge there.
The German court said that it’ll hold fresh hearings on July 30-31 to review the EU Court of Justice’s guidance before making its own decision.
“If the ECB resumes bond purchases under weakened conditions, our chances of success at the Federal Constitutional Court will rise,” Bernd Lucke, a German economist and one of the plaintiffs in that case, said via a spokesman. “I hope and expect that the court will immediately stop them.”
German businessman Juergen Heraeus, another of the plaintiffs, said he’d wait for the court’s ruling before deciding whether to launch another challenge.
The ECB has so far agreed to buy up to 33 percent of a nation’s public debt under QE, and won’t buy directly from governments. There is a 50 percent limit on debt from supranational agencies such as the European Investment Bank. The idea is to leave investors room to operate so that the market rather than the central bank sets the price of bonds.
According to Draghi, those limits depend on the economic risks facing the euro zone.
“The Treaty requires that our actions are both necessary and proportionate to fulfill our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face.”