Opinion

The message in the ruling

The German Constitutional Court's ruling on the ECB's asset purchase programme is open to much criticism but it can hardly be blamed for raising an important question.

By: Date: May 12, 2020 Topic: European Macroeconomics & Governance

From its pretence to establish itself as a custodian of the custodians to the narrowness of its perspective on central bank policy and the parochial assessment of the distributional consequences of monetary decisions, there is much to criticize in the ruling by the German Constitutional Court on the asset purchase programme initiated by the ECB in 2015. But it can hardly be blamed for raising an important question.

Europe’s central bank was born with the precisely defined mandate of preserving price stability. Over the years, however, the ECB was given new missions, as for banking supervision, or it took on new roles, as when Mario Draghi famously said that it would do “whatever it takes” to prevent a break-up of the euro. Until the 5th of May everything suggested that the coronavirus crisis would end up having been a further reason for expanding its mission.

For European leaders unable to agree to create a budget or a meaningful solidarity fund for the euro area, it was expedient to let the ECB contain interest rate spreads and mutualise risk through its balance sheet. Having relaxed quantitative benchmarks, the central bank was able to expand its government bonds portfolio and change its composition. It thereby created fiscal space for Italy at a time when Rome desperately needed it to fight off the health crisis and its economic consequences. Until the bombshell came.

It has been a longstanding view of German constitutional judges that whilst monetary policy decisions are delegated to an independent institution, actions that have a fiscal character must remain the exclusive prerogative of elected parliaments.

The distinction is a subtle but an important one when assessing bond purchases by the ECB: when it uses them to lower interest rates across the board, it fulfills its monetary policy mission; same also when it prevents nervous markets from triggering self-fulfilling debt crises; but things would be different if it were to pile up bonds issued by specific governments to contain the rise in bond spreads triggered by heightened solvency fears.

This is an old controversy. It erupted already in 2010 when the ECB started buying Greek debt. It was given a temporary solution with the launch of the (never activated) OMT programme in 2012. And it came back after Christine Lagarde said on 12 March that the ECB was “not here to close spreads” – before retracting precipitously in the following hours.

There are very good arguments to support the relaxation of ECB self-imposed limits to asset purchases decided on 18 March. These limits were largely arbitrary. But the Karlsruhe ruling has made the ECB lose some of its magic. What the German judges are telling European leaders in their lopsided way is that decisions for which they ought to take ownership should not be delegated to an unelected body.

This is an uncomfortable truth. But time has come for EU and its member states to face it.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint.

Due to copyright agreements we ask that you kindly email request to republish opinions that have appeared in print to [email protected].

Read about event More on this topic
 

Past Event

Past Event

Monetary and fiscal policy interaction in times of Next Generation EU

Could Next Generation EU enable a better coordination of monetary and fiscal policy

Speakers: Lorenzo Bini Smaghi, Grégory Claeys and Hans Vijlbrief Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: January 20, 2021
Read about event More on this topic
 

Past Event

Past Event

In search of a fitting monetary policy: the ECB's strategy review

The ECB is reviewing its monetary policy strategy. How to ensure monetary policy is fit for purpose in a fast changing world?

Speakers: Maria Demertzis, Philip Lane, Reza Moghadam and Erik F. Nielsen Topic: European Macroeconomics & Governance Date: January 18, 2021
Read article More on this topic More by this author
 

Blog Post

Has the European Union squandered its coronavirus vaccination opportunity?

The European Union’s purchases of frontrunner coronavirus vaccines are insufficient for the population’s near-term needs. The shortfall could have healthcare consequences and might delay economic reopening. Lessons should be learned for future pandemics.

By: J. Scott Marcus Topic: Innovation & Competition Policy Date: January 6, 2021
Read article More on this topic More by this author
 

Blog Post

When the future changes the past: fiscal indicator revisions

The 2020 pandemic economic shock has led to reassessment of fiscal policy measures in 2018 and earlier, because of faulty measurement of unobserved output gaps and structural balances. The current period of suspension of EU fiscal rules should be used to design a better fiscal framework.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: January 5, 2021
Read article Download PDF
 

Parliamentary Testimony

European Parliament

Monetary Policy in the times of corona: many unknown unknowns

Testimony to the European Parliament on monetary policy.

By: Maria Demertzis and Marta Domínguez-Jiménez Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: December 21, 2020
Read article More on this topic More by this author
 

Opinion

How to minimise the impact of the coronavirus on the economy

COVID-19 is a global killer. Austerity needs to succumb.

By: Rebecca Christie Topic: Global Economics & Governance Date: December 2, 2020
Read article More by this author
 

Podcast

Podcast

Steering the boat towards an unknown destination

Shocks pass, but change remains a constant. We need to start focusing on permanent changes in the economy and how to adapt to them.

By: The Sound of Economics Topic: European Macroeconomics & Governance, Global Economics & Governance Date: November 25, 2020
Read article Download PDF More by this author
 

Parliamentary Testimony

European Parliament

New life for an old framework: redesigning the European Union's expenditure and golden fiscal rules

Testimony before the European Parliament on the subject of EU fiscal policies.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 17, 2020
Read article Download PDF
 

External Publication

European Parliament

Monetary policy in the time of COVID-19, or how uncertainty is here to stay

The COVID-19 crisis has compounded the uncertainty that has come to characterise the European economy. We explore how this uncertainty manifests itself in terms of ECB decision-making and the long-run challenges the ECB faces.

By: Maria Demertzis and Marta Domínguez-Jiménez Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: November 12, 2020
Read article More on this topic
 

Blog Post

Growth uncertainty, European Central Bank intervention and the Italian debt

European Central Bank intervention provides a buffer against the uncertainty faced by European Union economies in the face of COVID-19. For the time being, this intervention has alleviated concern about Italy's debt, but without it Italy is vulnerable to a debt crisis.

By: Andrea Consiglio and Stavros Zenios Topic: European Macroeconomics & Governance Date: October 28, 2020
Read article Download PDF
 

External Publication

European Parliament

New life for an old framework: redesigning the European Union's expenditure and golden fiscal rules

This briefing paper focuses on two aspects of the EU fiscal framework: whether an expenditure rule would be more reliable than a structural budget balance rule and the possible benefits and drawbacks of introducing a golden rule to exclude certain types of investment from the operational fiscal rule.

By: Zsolt Darvas and Julia Anderson Topic: European Macroeconomics & Governance, European Parliament, Testimonies Date: October 14, 2020
Read article More on this topic More by this author
 

Opinion

Eastern Germany’s New Growth Engine

Eastern Germany has suffered from three decades of deindustrialization since the collapse of communism, largely because of poor policy decisions. But by becoming an electric-vehicle powerhouse, the region can help to drive Europe's green transition and secure its own future prosperity.

By: Dalia Marin Topic: European Macroeconomics & Governance Date: October 7, 2020
Load more posts