FRANKFURT, Germany (AP) — A legal opinion issued Wednesday by an adviser to the European Union's top court helps clear the way for bigger stimulus measures from the European Central Bank, analysts said.
The opinion from Pedro Cruz Villalon, an advocate general with the European Court of Justice, said that the ECB's offer in 2012 to buy government bonds of troubled countries was legal in principle.
He said the ECB would have to explain the reasons why an emergency justified the purchases, and must let markets set bond prices first before it purchases them. Otherwise, he affirmed the ECB's right to set monetary policy with limited scrutiny from judges.
Markets have been watching the case to learn whether the court might impose restrictions that could affect the ECB's plans for a new, larger stimulus program also based on purchases of government bonds. Investors think the central bank may announce such large-scale purchases of government bonds at its Jan. 22 meeting. The new program would aim to foster growth and nudge up inflation.
Jonathan Loynes, chief European economist at Capital Economics in London, said Wednesday's court decision "would seem to clear the path" for a bigger program of bond-buying next week.
The earlier bond purchase program, announced in 2012, helped calm market turmoil that was threatening to break up the euro bloc. The ECB never bought any bonds, but the mere offer reassured markets.
Opponents in Germany, however, challenged the program in court. They say the ECB overstepped its authority and violated a European Union treaty ban on the central bank directly helping governments.
Villalon's opinion is preliminary, before a decision by the court's judges later this year.
Yves Mersch, member of the ECB's executive board, noted how the legal opinion found that the central bank must have "wide discretion" in framing its policies and that courts must exercise "a considerable degree of caution" in reviewing its activity.
Mersch said that while the opinion was limited to the 2012 bond-buying program, it "clearly states it is the ECB which has sole responsibility for the conception, definition and implementation of monetary policy."
European government bond prices rose in the wake of the decision in anticipation of possible purchases from the central bank. That sent yields down, since yields and price move in opposite directions. Germany's 10-year bond yielded only 0.43 percent annually, compared with 1.82 percent for 10-year U.S. Treasurys.