ECB’s First Problem on German Court’s QE Demand Is Who Responds

(Bloomberg) -- The key question emerging from European Central Bank discussions after Germany’s constitutional court legal bombshell is who will defuse it.

While the Governing Council hasn’t decided on a plan to respond to Tuesday’s ruling, which declared the ECB’s biggest bond-buying program potentially unconstitutional, members are split on who takes the lead, according to people familiar with the matter.

Some see the issue as a domestic matter to be mainly resolved between the Bundesbank and the German government, the people said on condition of anonymity.

Bundesbank President Jens Weidmann, on the other hand, said in his official statement that his central bank would “support” the Governing Council’s efforts, suggesting that he thinks the ECB should be at the forefront.

Spokespeople for the ECB and the Bundesbank declined to comment on the issue.

Taking Note

The ruling has sparked fears it could undermine the ECB’s efforts to prop up the euro-area economy. While the judges said their decision doesn’t affect the central bank’s emergency program to fight the coronavirus pandemic, it clearly calls into question how far bond-buying programs can go.

The initial response by the Governing Council after a call on Tuesday evening was to say it “takes note” of the judgment while also pointing to a 2018 ruling in its favor by the European Union’s top court.

Yet one overarching concern among policy makers is that the decision has thrust the ECB into uncharted territory. Some even wondered whether the pandemic emergency program could now become another target of litigation, the people said.

Officials left the call with little practical sense of how the ECB should address the court’s request to justify their policy within three months.

The virtual meeting, which featured presentations from Weidmann and lawyers, focused mainly on explaining the ruling rather than coming up with solutions, the people said. The decision on who should respond was seen as too controversial to tackle at this point, one of them said.

One thing they did agree on was that the ECB has made sufficient effort to explain its policies since launching the quantitative-easing program in question in 2015.

While providing a justification would be largely a matter of compiling that material in a single accessible form, there were reservations over whether that’s the best way forward.

Another approach that some policy makers say might work is for Weidmann to appear in front of the German parliament to explain the decision.

However, the Bundesbank chief was clear during his presentation that the response should be prepared by the Governing Council, some of the people said.

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