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Germany’s PSPP challenge: of secondary importance

By Craig McGlashan
15 Aug 2017

Germany’s constitutional court has referred several questions to the European Court of Justice over whether the Public Sector Purchase Programme (PSPP) is compatible with European Union rules prohibiting monetary financing by central banks. As was proved with Germany’s challenge of the European Central Bank’s Outright Monetary Transactions (OMT), there is again likely to be little effect from the move — and in any case, Germany’s judiciary should learn that at times of crisis, central banks should be left to wave their magic wands.

On the face of it, Germany’s court may have a point in its questions for the ECJ. Although the ECB can only buy public sector debt in secondary markets — unlike when it buys corporate and covered bonds — the court argues that PSPP “nevertheless violates Art. 123 AEUV [the rule prohibiting the ECB and member state central banks from buying bonds directly from member states or EU institutions], namely the fact that details of the purchases are announced in a manner that could create a de facto certainty on the markets that issued government bonds will, indeed, be purchased by the Eurosystem”.

Well, maybe. But there are a lot of arguments against that — mainly that the ECB can only buy up to a certain amount of a single issue or of a single borrower’s issuance. Sure, a punter can almost certainly expect to find a home in Frankfurt for some of his or her newly purchased bonds, but it’s not definite.

Moreover, a large number of investors in the SSA market buy and hold — the member states and institutions would likely get their financing done anyway, albeit at a higher price.

But such arguments miss the larger point. During times of crisis, central banks have always bent the rules to conjure up ways of buying governments time to act.

Just look at the excellent work published last week by a group including academics from Queen Mary University of London and a Bank of England archivist. When faced with a dud War Loan issue at the start of World War I (the debut issue, no less), the Bank of England found a novel way to make the trade look like a success (the full account is available here).

Some might frown on such skulduggery, but during times of grave crisis shouldn’t it be the central bank’s duty to do everything it can to win the day for its owners — i.e. the citizens of its country? When normality is disrupted, as it was in World War I and as was the case during the eurozone debt crisis, many other institutions bent the rules to ensure the state could survive the turmoil. 

Why should the central bank be any different?

So long as the rule bending ceases once the danger has passed, no one should complain. Such was the case with the UK’s War Loan in 1914. No less a figure than John Maynard Keynes described the BoE’s actions as “masterful manipulation”, but warned that it should be a one-off — not even remaining in place during the rest of the war.

PSPP has stayed in place during the ECB’s battle against eurozone disintegration, but all the signs are that we are reaching the beginning of the end of the policy. Many analysts expect tapering to begin early next year.

All of which provides the best case yet that the German court’s actions are futile. It took well over a year for the ECJ to reach a decision on Germany’s questions over OMT. That means that while the German judges may well want to stop PSPP, it looks increasingly likely that the ECB will have already done that for them.

By Craig McGlashan
15 Aug 2017