By Michele Sinner and Francesco Canepa
LUXEMBOURG/FRANKFURT (Reuters) - The European Central Bank won a landmark court case on Tuesday as the European Union's top judges backed its multi-trillion- euro purchases of government bonds after a complaint by a group of German eurosceptics.
The widely expected ruling defuses a legal battle that has dogged the ECB's stimulus policy for years and sets a key precedent for future decisions. The matter will now be sent back to Germany's constitutional court for a final verdict.
The Court of Justice of the European Union rejected arguments that the ECB was effectively bankrolling governments with its 2.1 trillion-euro ($2.39 trillion) Public-Sector Purchase Programme (PSPP), which is expected to stop at the end of this month.
"The Court... finds that the PSPP programme does not infringe the prohibition of monetary financing," the judges said in a press release.
Their ruling had been requested by Germany's constitutional court in Karlsruhe, which said there was good reason to think the plan exceeded the ECB’s mandate and violated a ban on it funding governments.
"This ruling is unambiguous," said Christoph Schalast, a law professor at the Frankfurt School of Finance & Management. "The German constitutional court faces a difficult decision because its legal opinion was rejected pretty unequivocally by the European Court."
The EU's court batted back the argument that the ECB was endangering taxpayers' money, noting the bulk of any loss on a government's bond would fall on its national central bank.
This feature of the PSPP was the key precondition to overcome German resistance to beginning the programme in 2015, but it may limit the ECB's options when devising new policy tools.
While Berlin stood behind the ECB in Karlsruhe, it still made its support conditional on limits to the potential exposure of the Bundesbank to losses elsewhere.
Following an opinion submitted by the Italian government, the EU court did not admit a question over whether the ECB could change the way losses are distributed if a government fails to repay.
Three of the complainants slammed the European ruling as "a provocation".
"(The EU court) dismissed the objections of the highest German court, inasmuch as it even took them into consideration, in a manner that can only be described as a provocation," entrepreneurs Heinrich Weiss, Patrick Adenauer and Juergen Heraeus, said in a joint statement.
The ECB was expected to announce this week that it will stop adding to its 2.6 trillion euros of bonds at the end of the year, although it would reinvest proceeds from maturing debt for a long time.