ECB Tackles German Court Ruling With Claim QE Helps the Economy

(Bloomberg) -- European Central Bank officials insisted at their latest policy meeting that bond purchases are the best tool to stimulate the economy and have inbuilt safeguards against side effects, directly tackling the core argument of a German legal ruling against quantitative easing.

The account of the Governing Council’s June 3-4 teleconference showed that Chief Economist Philip Lane argued both an older and more recent asset-purchase programs were “proportionate measures” for pursuing price stability.

Germany’s top court ruled in May that a 2015 bond-buying program, which is still running, could be illegal because the ECB hadn’t shown it had taken into account adverse results such as depressed interest rates for savers and risks to financial stability.

That ruling threatened to undermine a key plank of the ECB’s drive to lift euro-area inflation. On Wednesday, the Governing Council agreed to release non-public documents to the German authorities to resolve the legal standoff, according to officials familiar with the matter.

The June meeting showcased President Christine Lagarde’s determination to do whatever is needed to help fight the biggest peacetime recession in almost a century. The ECB increased the size of its newer -- and more powerful -- pandemic emergency bond-buying program and extended its duration.

That decision wasn’t a smooth one though. The account showed that some Governing Council members expressed reservations about the size of the expansion, arguing for a “more cautious approach.”

At the same time, it was “generally felt that not acting at the present meeting could trigger a further tightening of financial conditions, to the detriment of the economic recovery,” the account showed.

Lane noted that the overall purchase amount, which was lifted to 1.35 trillion euros ($1.5 trillion) “should be understood as a ceiling, which implied that in the event of significant upside surprises to the outlook, the full envelope would not need to be used.”

What Bloomberg’s Economists Say

“The significant deterioration in the inflation outlook is a theme that looms large in the minutes from the last meeting of the European Central Bank. The record of the debate between policy makers dashes all hope of any normalizing of monetary policy in the foreseeable future.”

-David Powell. Read his ECB REACT

The pandemic program has already attracted a lawsuit, highlighting the hurdles the ECB faces with the unprecedented scale of its stimulus.

In the May ruling, the judges said the German authorities should have challenged the ECB to show that it had considered the adverse side effects. If the program isn’t shown within three months to be “proportionate” then the Bundesbank, the biggest buyer, will have to withdraw.

The Governing Council has now agreed to provide evidence that the ECB gave to the European Court of Justice in 2018, when that tribunal declared the program is in line with European Union law, according to officials familiar with the matter.

The documents will be modified to protect confidentiality and market sensitivity, they said, and will be provided to Bundesbank President Jens Weidmann, who will pass them on to the German parliament and government.

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