Legal challenge shows European Central Bank’s limits

A landmark legal opinion this week will remind the European Central Bank of the limits it faces as it advances towards money printing, while a tumbling oil price saps inflation in debt-strained Europe.

With expectations high that the ECB is on the verge of buying government bonds with new money to shore up the economy, an influential adviser to Europe’s top court will give his view on Wednesday about an earlier unused bond-buying scheme.

It is the latest chapter in a long-running and increasingly bitter dispute about quantitative easing (QE) between the ECB and Germany, the largest member of the 19-country bloc, that is likely to limit the size or scope of such a programme.

As the debate continues, the eurozone economy is all but grinding to a halt. Germany is expected to announce modest growth on Thursday for last year.

Hopeful eyes are turning to the ECB. But German opposition to money printing could put a fly in the ointment.

Its Bundesbank has warned that buying bonds issued by eurozone governments could leave it on the hook for losses.

This week, an adviser to Europe’s top court will give his opinion on a challenge by a group of Germans to an earlier ECB bond-buying programme. If he shares any of the concerns of Germany’s constitutional court, which referred the case to European judges, it would be significant.

Alain Durre, an economist with Goldman Sachs, said this could lead to the ECB setting a fixed limit on its bond-buying plans or to take priority over other investors when it buys state bonds.

Whatever the outcome, the German protest is likely to get louder. “The ECB has stepped beyond its remit. The European court should forbid the ECB from doing this,” said Dietrich Murswiek, a lawyer representing one of the plaintiffs.

“You can draw parallels with quantitative easing. From my point of view, QE is also beyond its remit. This can also lead to legal action.”

Elsewhere, British inflation will be watched on Tuesday, with analysts betting it will hit a fresh 12-year low below 1%.

Those looking for respite elsewhere may be disappointed. The People’s Bank of China cut the cost of borrowing in November and loosened loan restrictions to encourage lending.

It is expected to take further such steps, as the country’s property market downturn continues and local governments and companies grapple with heavy debts. Bank lending data and a readout on economic output in the final three months of last year are likely to paint a glum picture.