The European Central Bank on Tuesday stood firm after Germany’s top court questioned its massive bond-buying stimulus scheme, vowing to do “everything necessary” to fulfil its mandate of ensuring price stability.
In a shock ruling, Germany’s Constitutional Court gave the ECB three months to clarify key elements of its support to the eurozone, but stopped short of overturning its crisis-era “quantitative easing” (QE) bond-buying scheme altogether.
However, Germany’s Bundesbank central bank will be barred from participating in QE after the deadline unless the ECB can show its government debt purchases are not “disproportionate”, judges in Karlsruhe said.
The court also raised an unprecedented challenge to the Court of Justice of the European Union (CJEU), labelling its earlier ruling rubber-stamping the QE scheme “not comprehensible” and declaring it not legally binding.
The ECB said it “takes note” of the Karlsruhe judgement, after its 25-member governing council held a telephone conference to discuss its response.
“The Governing Council remains fully committed to doing everything necessary within its mandate” to maintain price stability in the eurozone and ensure its monetary policy action filters through to the real economy, it said.
Crucially, presiding judge Andreas Vosskuhle stressed that the ECB’s new 750 billion euro ($813 billion) “Pandemic Emergency Purchase Programme” (PEPP) launched to fight the impact of the coronavirus was not directly affected by the ruling.
German Chancellor Angel Merkel said in a meeting with lawmakers from her centre-right CDU party that the Karlsruhe judgement showed the limits of what the ECB can do, a source told AFP.
The ruling turned on the idea of whether the ECB’s bond-buying programme can justifiably be seen as proportional when weighed against the risks.
By buying up government bonds – so far totalling 2.2 trillion euros – QE is designed to drive private investors’ cash into riskier investments, stoking economic growth and in turn powering inflation towards the ECB’s goal of just below 2%.
But the policy also has side effects, the BVG noted, potentially impacting “public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies”.
The CJEU found that such supposed side effects were admissible in the pursuit of the ECB’s overarching objective, accepting the central bank’s judgement on what interventions are necessary in pursuit of its goal.
By contrast, the German judges argued that the European court’s ruling “allows asset purchases even in cases where the purported monetary policy objective is possibly only invoked to disguise what essentially constitutes an economic and fiscal policy agenda”, such as lowering borrowing costs for individual euro member states.
Such a legal interpretation would effectively transfer competences over economic and fiscal policy from the national to the European level, the judges added.
By ruling in favour of something not permitted without changes to the EU’s founding treaty, the CJEU had made its judgement “ultra vires” or outside the law, they said.
Henrik Enderlein, director of the Delors Institute think-tank in Berlin, said the BVG’s ruling gave the court discretion over a border between permissible “monetary” and forbidden “economic” policy that “can’t be defined”.
Former ECB vice president Vitor Constancio was blunter, calling the distinction between monetary and economic policy “ridiculous”.
Many observers warned that the German court’s insistence on constraints to QE could hamper the ECB down the road.
So-called issuer limits and the capital key restrict how much debt from any one government the ECB can buy, with the result that purchases must be in line with states’ shares in the central bank’s capital.
Such restrictions threatened to put the brakes on the ECB’s support to the eurozone economy before the coronavirus struck, and were dropped in the design of the crisis-fighting PEPP scheme.
“The Bundesbank should be able to keep the German issuer share below 33% for the foreseeable future… but that is excluding PEPP holdings,” Pictet Wealth Management economist Frederik Ducrozet said.
With the coronavirus crisis likely to deepen, forcing the ECB to extend PEPP in size and duration, “this situation is hardly sustainable,” Ducrozet added.