A European Central Bank bond-buying plan floated in 2012 would not break EU law subject to certain conditions, a top adviser to the European Union's highest court said today.
Pedro Cruz Villalon, advocate general at the court, said the ECB was entitled to buy bonds and that the scheme outlined was "necessary" and "proportionate".
But it added that it would first have to spell out its justification and remove itself from any direct aid programme to a euro zone member state.
That would make it difficult for the ECB to continue as a member of the troika of inspectors that supervises Greece and Cyprus with an emergency aid programme if they were also to benefit from bond-buying.
"The Advocate General considers that the OMT programme is necessary as well as proportionate in the strict sense, since the ECB does not assume a risk that will necessarily make it vulnerable to insolvency," the court said in a statement.
Although today's opinion looks at a bond-buying blueprint from 2012, designed at the height of the crisis to avert a break-up of the euro, it could shape future QE (quantitative easing) to buy state bonds in order to avert deflation.
The adviser's opinion is another milestone in a long-running dispute about printing money between the ECB and Germany, the largest member of the 19-country bloc.
The ECB is on the verge of announcing a scheme as soon as next week to buoy falling prices and put the struggling economy back on a steady footing.
The adviser fired a shot across the bows of the German Constitutional Court, which had referred the question to Europe's top court, saying it was hard for courts to call the ECB into question as they had little expertise to do so.
"The ECB must have a broad discretion when framing and implementing the EU's monetary policy, and the courts must exercise a considerable degree of caution when reviewing the ECB's activity, since they lack the expertise and experience which the ECB has in this area," the statement said.
However, it may limit ECB President Mario Draghi's room for manouevre as he tries to make good a promise to do 'whatever it takes' to save the euro.
Opponents of QE may seize upon the judgment that the OMT programme was designed in a way that the ECB would not take on risk that could make it vulnerable to insolvency.
That could raise a question about an open-ended bond-buying programme with new money and potential losses the ECB could suffer if those bonds were defaulted upon.
One option being considered is for euro zone national central banks to do the bond-buying rather than the ECB.
Draghi says ECB needs expansive monetary policy
European Central Bank President Mario Draghi said a loose monetary policy is needed to achieve price stability in the euro zone and the Governing Council is determined to deliver this.
With euro zone consumer prices turning negative in December for the first time in five years, there are growing doubts among policymakers whether the ECB's stimulus implemented so far will enough to prevent the euro zone from slipping into deflation.
To achieve the ECB's medium-term inflation target of below but close to 2%, the ECB must "keep interest rates low and work towards an expansive monetary policy that accompanies growth," Draghi told Die Zeit in an in advanced release of an interview to be published tomorrow.
He added that there were differences on the Council about how to achieve the bank's mandate mandate, "but it is not like we have endless possibilities."
The ECB could widen its asset purchases to government bonds and is preparing such a step that is also known as quantitative easing (QE) for its January 22 policy meeting, at which it could decide to pull the trigger on the plan.
