Defiant ECB Pledges Full Commitment After German QE Ruling
Defiant ECB Pledges Full Commitment After German Ruling on QE
(Bloomberg) -- The European Central Bank responded to a German court ruling criticizing its long-standing bond-buying program by pledging to continue doing everything necessary to revive inflation.
After an evening conference call to discuss the surprise decision by Germany’s constitutional court, the Governing Council said it took note of the judgment. But it also pointedly remarked that the top European court has previously said quantitative easing is legal.
“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.”
The ECB was given three months to prove that its asset-purchase program, which has bought 2.7 trillion euros ($2.9 trillion) of debt since 2015 and is adding more each month, is in line with the law.
Tuesday’s ruling won’t stop purchases immediately and it doesn’t affect a separate 750 billion-euro plan launched in March to combat the coronavirus crisis. It does, however, raise question marks over just how far the ECB can push its monetary stimulus.
The decision is a “legal bombshell,” said Holger Schmieding, chief economist at Berenberg. “Whether the German constitutional court’s restrictions have an impact on market perceptions as to how effective the ECB can respond to the current economic emergency remains an open question.”
Speaking on Wednesday from Tallinn, Estonian governor Madis Muller called the court’s decision “remarkable.” The Governing Council “is in a delicate situation” when it comes to responding to the ruling because it isn’t directly addressed to “the ECB or even German Bundesbank,” he said.
The initial response of investors was shock -- the euro slid and bond yields fluctuated before rising in stressed economies such as Italy. The single currency remained lower after the ECB statement, trading down 0.5% at $1.0849.
The lawsuit was filed by a group of businessmen and academics, frequent critics of the EU who argued that the ECB is improperly conducting economic policy instead of just monetary policy. A key concern is whether sovereign-bond purchases break EU law banning direct financing of governments.
German Finance Minister Olaf Scholz played down the judgment, saying the court “clearly ruled” that QE isn’t monetary financing and the program complies with the German constitution.
He also said it shows the need to “further deepen and intensify European cooperation” -- implicitly acknowledging the burden the ECB has taken on as governments struggle to agree on joint fiscal stimulus to tackle the coronavirus.
That’s a risk for the currency bloc. The ruling could have excluded the Bundesbank from the asset purchase program, which is running at 20 billion euros a month with an additional 120 billion euros as part of measures to combat the current downturn. With Germany the euro zone’s biggest economy, its central bank accounts for the biggest share of purchases.
What Bloomberg Economists Say...
“The German Constitutional Court’s ruling means the European Central Bank will justify its policy actions within three months, but in the meantime, at least, there is no material roadblock to asset purchases going ahead.”
-Jamie Rush. Click here to read the full INSIGHT.
Instead, in a complex decision, the judges ruled 7-1 that QE isn’t backed by European Union treaties, and said German authorities should have challenged it.
They said the ECB should have discussed a number of factors on how QE may have affected a wide swath of the economy, including shareholders, renters and insurance buyers.
Bundesbank President Jens Weidmann, a frequent critic of QE, responded to the ruling by saying it “highlights important features” of the program -- such as limits on how much debt can be bought -- that ensure a “sufficient safety margin” against monetary financing, and that he has stressed the importance of such a margin in the past.
But the judges also offered a way out -- telling the Frankfurt-based central bank to come back within three months with a justification for its policy.
The ruling “only concerns the duty of the ECB to scrutinize its own action under a proportionality guideline and to document that,” said court president Andreas Vosskuhle. “The ECB isn’t per se blocked in any way.”
Yet that still raises the prospect of future challenges to a stimulus program that the ECB insists is a key part of its measures to revive the economy and restore inflation. It also opens the door to action against the pandemic program, which is stripped of most of the limits that constrained QE.
“For me this suggests it will never end and therefore we will constantly continue to face questions on how far the ECB can go,” said Lucas Guttenberg, deputy director at the Jacques Delors Centre in Berlin. “Politically it means we can’t rely on the ECB to save the day because we simply don’t know when the line will eventually be drawn.”
The decision has wider implications for the European Union, testing the relationship between the EU Court of Justice and national courts. In 2017, the judges asked the EU court for an interim ruling aimed at limiting the ECB’s leeway, but the tribunal rejected that restrictive reading of the law.
The latest German ruling “is an invitation for other countries to simply ignore decisions that they don’t like,” said Joachim Wieland, a law professor at the University of Administrative Sciences.
Case number: BVerfG, 2 BvR 859/15 et al
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