How will monetary policy fail

Karlsruhe: defeat for opponents of the ECB government bond purchases

Karlsruhe (dpa) - The Deutsche Bundesbank can continue to participate unrestrictedly in the controversial government bond purchases of the European Central Bank (ECB).

Following the ruling by the Federal Constitutional Court a good year ago, the federal government and the Bundestag adequately reviewed the purchases. The court came to this conclusion in a decision published on April 29th.

Two applications for a so-called enforcement order, with which the Federal Constitutional Court could have determined the implementation of the judgment, were rejected by the Second Senate as unfounded. (Ref .: 2 BvR 1651/15 etc.) The opponents of the government bond purchases reacted disappointed.

A good year ago, the Constitutional Court objected to the ECB's purchases of government bonds, thus ignoring a preliminary ruling by the European Court of Justice (ECJ) for the first time. The Second Senate had largely upheld several lawsuits against the PSPP purchase program launched in 2015 to stimulate inflation and the economy. The central bank is thus overstretching its mandate for monetary policy.

The Bundesbank may only participate if the Governing Council clearly demonstrates that the monetary policy objectives pursued with the multi-billion dollar purchase program are not disproportionate to the associated economic and fiscal policy effects. The federal government was given three months to persuade the ECB to review the objectionable purchase program. The Bundesbank is the central bank's largest shareholder. Their purchase volume is correspondingly large.

However, opinions differed as to whether the politicians had properly implemented the court's requirements. While the federal government and the Bundestag were convinced of this, the former CSU politician Peter Gauweiler and a group of plaintiffs around the former AfD boss Bernd Lucke saw it differently and forced a review by the court.

The Constitutional Court listed everything that had happened since the verdict: For example, various Bundestag committees quickly dealt with the issue. There was a current hour in the plenary and the scientific services of the Bundestag had prepared a draft on the conformity of the PSPP with Union law.

At a monetary policy meeting at the beginning of June, the Governing Council then passed, among other things, two decisions on the proportionality of the PSPP. At the end of June, the Bundesbank sent various ECB documents - some of which were classified as confidential - to the Federal Ministry of Finance. On July 2, after a public debate, the Bundestag determined that the proportionality test carried out by the Governing Council met the requirements of the judgment.

"As a result, the Federal Government and the Bundestag have not remained inactive," the Senate concluded. Neither did they take obviously unsuitable or completely inadequate measures to fulfill their obligation after the judgment. "It is not evident that they have exceeded their assessment, evaluation and creative leeway." In addition, the applications for enforcement were inadmissible because they went beyond the factual and legal situation assessed, the communication said.

The critics of the government bond purchases reacted disappointed. Lucke criticized that it was not possible to look into the ECB documents. Gauweiler announced that he would defend democracy and the rule of law again before the Federal Constitutional Court if the Federal Government and Bundestag violated their duty to defend the principles of democracy “against the presumption of the EU organs”.

Because Karlsruhe had openly opposed the ECJ with its judgment of May 5, 2020, the EU Commission is still examining whether it will initiate so-called infringement proceedings against Germany. The ECJ had given the purchase program its blessing in December 2018 against massive concerns from Karlsruhe.

There is a lot of money in circulation through bond purchases, which usually fuels inflation. The ECB is aiming for an inflation rate of just under 2.0 percent in the medium term. Stagnating or falling prices can tempt consumers and businesses to postpone investments. That can slow the economy down.

According to Friedrich Heinemann from the Center for European Economic Research (ZEW), Karlsruhe put the constitutional dispute over the ECB bond purchases in the context of the PSPP before the pandemic on hold.

Lawsuits have also been filed in Karlsruhe against the current emergency purchase program for government bonds and corporate securities (Pandemic Emergency Purchase Program / PEPP), which was not the subject of the proceedings. With the program, which has been running for around a year, Europe's monetary authorities are bracing themselves against the economic consequences of the corona pandemic.

© dpa-infocom, dpa: 210518-99-641112 / 4