ECB faces tough task in navigating BVG verdict
Germany's Federal Constitutional Court (BVG) touched off a legal bombshell on Tuesday morning. It left the ECB in an impossible position: it can accept the court's verdict or ignore it, but either decision will undermine its efforts to stabilise Europe's capital markets.
The verdict from the BVG in Karlsruhe flew in the face of the European Court of Justice’s decision of December 2018, which said that the ECB's Public Sector Purchase Programme was legal. The German court has attacked both the ECJ’s verdict and its right to reach it in the first place, claiming that both it, and the ECB, are overstepping the mark.
As a result, the court has ruled that the Bundesbank will, after a three month transitional period, no longer participate in the PSPP, unless the ECB provides a thorough assessment of the economic impact of the scheme and shows that its aims are not disproportionate to its effects.
The court’s own assessment of the proportionality is scathing, to say the least, but particularly firm that the decisions have fiscal consequences that were not assessed by the ECJ.
The ECB has two choices. It can accept the BVG's verdict and, perhaps not unreasonably, provide an assessment of the impact of the economic implications of its extraordinary policy decisions.
Doing so in a firm and convincing manner, refuting the points made by the BVG's panel of handpicked hawks, might even silence future attacks on the ECB’s policy choices.
But to do so would upend the legal order of the European Union. For the ECB to accept the ruling of a national court in contravention of the ruling of the European court would establish a dangerous precedent. Other national courts from Germany’s fellow hawks in Austria and the Netherlands might elect to mount their own legal challenges to the ECB’s action.
If it entertains one country's judgement, it will find it very difficult to reject others, and each time it does so, it will find its authority to transmit monetary policy to the eurozone economy constrained by courts that are not supposed to have jurisdiction over it. And what then if eurozone periphery states challenge it? Avoiding tangles like that is the very purpose of the European court, whose decision it would flout by listening to the German verdict.
Moreover, by acknowledging the BVG’s authority, the ECB will likely find its Pandemic Emergency Purchase Programme (Pepp) facing similar challenges soon. The Pepp may soon be the slender reed on which rests the ECB’s ability to control eurozone spreads. If this is challenged too, then the ECB will be toothless and the eurozone periphery at the mercy of the market’s assessment of their spiralling debt ratios.
But if the ECB ignores the ruling, then the Bundesbank’s loyalty to the BVG will be weighed against its loyalty to the Eurosystem. With established hawk Jens Weidmann at the helm, the Bundesbank will likely listen to Germany. Indeed, Weidmann has already said that he will support the ECB’s governing council in compiling the necessary report.
Such a schism at the heart of the EU’s monetary policy would be shocking. The ECB could make up the shortfall with other national central banks, and the Bundesbank will likely continue to participate in the Pepp, and refrain from dumping its EGB holdings (mostly Bunds in any case) — after all when have trifles like the law ever got in the way of European policy in a financial crisis? But the credibility of the ECB would surely be impaired.
The ECB would find it much harder to maintain spreads at a comfortable level when its ability to expand its programmes is called into question.
Unless the European Commission wows us with a jointly financed trillion euro recovery fund then the damage done to the perception of European solidarity will be irreparable. The periphery’s ability to finance itself will be torpedoed and the ECB’s backstop, when needed most, will be hurting for credibility.
The ECB may find a middle path — perhaps by avowedly rejecting the Karlsruhe ruling, but publishing an impact assessment anyway, allowing the Bundesbank to remain — but it has a difficult path to walk to get to a position of safety now.