ECB 'takes note' of German court decision over bond purchase programme
The German court found that the Federal Government and the Bundestag violated the laws by failing to challenge the European Central Bank’s (ECB) decision to adopt and implement the Public Sector Purchase Programme (PSPP), while neither assessing nor substantiating if these measures satisfied the principle of proportionality. While ruling that the ECB’s PSPP was legal, the court has directed Bundesbank to withdraw its participation in the programme within three months, unless the central bank provides a justification of the proportionality of the measure or if the bank can prove that the purchases are needed.
The court also added that it did not find a violation of the prohibition of monetary financing of Member State budgets and stated that the decision doesn’t concern any financial assistance measures taken by the EU and the ECB in the context of the Coronavirus crisis, according to an official statement.
Reacting to the decision, the ECB governing council said it received a preliminary briefing by the governor of the Bundesbank and by the legal department of the European Central Bank (ECB). “The ECB takes note of today’s judgment by the German Federal Constitutional Court regarding the Public Sector Purchase Programme (PSPP).
“The Governing Council remains fully committed to doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim and that the monetary policy action taken in pursuit of the objective of maintaining price stability is transmitted to all parts of the economy and to all jurisdictions of the euro area,” said the ECB in a press release, recalling that the Court of Justice of the European Union ruled in December 2018 that “the ECB is acting within its price stability mandate.”
The PSPP is a part of the Expanded Asset Purchase Programme (EAPP), a framework programme of the Eurosystem for the purchase of assets on financial markets. The EAPP is meant to increase money supply and intended to support consumption and investment spending in the euro area and ultimately contribute to achieving an inflation target of levels below, but close to, 2%.
The ECB launched the PSPP with its decision of 4 March 2015, which was later amended by five subsequent decisions. Under the PSPP, the Eurosystem central banks – subject to the framework set out in detail in the ECB decisions – purchase government bonds or other marketable debt securities issued by central governments of euro area Member States, by ‘recognised agencies’ and international organisations or by multilateral development banks located in the euro area.
Need to identify and weigh economic policy effects
Regarding the principle of proportionality, the court stated that measures such as PSPP – which have significant economic policy effects – requires that its monetary policy objectives and economic policy effects needs to be identified, weighed and balanced. “By unconditionally pursuing the PSPP’s monetary policy objective – to achieve inflation rates below, but close to, 2% – while ignoring its economic policy effects, the ECB manifestly disregards the principle of proportionality,” said the court in an official statement.
Furthermore, the ECB has failed to conduct necessary balancing of the monetary policy objective against the economic policy effects arising from the program. “Given that the PSPP’s negative effects increase the more it grows in volume and the longer it is continued, a longer programme duration gives rise to stricter requirements as to the necessary balancing of interests,” added the court.
The PSPP also affects the commercial banking sector by transferring large quantities of high-risk government bonds to the balance sheets of the Eurosystem, which significantly improves the economic situation of the relevant banks and increases their credit rating. The court pointed out that the PSPP lowers general interest rates, allowing economically unviable companies to stay on the market.
The court called on ECB to provide documentation where economic policy effects of PSPP were balanced based on proportionality considerations.
Nicolas Veron, senior fellow at European think-tank Bruegel and the Peterson Institute for International Economics, reacted to the German court's decision, on Twitter. He commented: “This is standard fare in a federal framework and shouldn't be overdramatized. Courts of different levels jostle for position. Meanwhile, the ECB's programs live on.”