Time for EU fiscal stimulus

The sustained attacks on the European Central Bank should serve as a wake-up call for eurozone leaders

Germany’s highest court ruled last week that the European Central Bank (ECB) exceeded its mandate in pursuing Quantitative Easing (QE) to rescue the eurozone from the sovereign debt crisis. The verdict is the culmination of fresh hearings that commenced in the country last year to apply the 2018 European Court of Justice decision to uphold the controversial programme. QE refers to the unconventional monetary tool of public sector asset purchases the ECB has deployed to stimulate economic demand and stoke inflation in the eurozone. The court in Karlsruhe has asked the Frankfurt-based institution to justify its huge purchases of government bonds. Failure to furnish proof within three months that these purchases have not had a disproportionate impact on other economic policies risks jeopardising Berlin’s participation in QE, the court observed.

Claims and counterclaims

The ECB’s bond-buying under QE, of over €2.2 trillion since 2014, in order to raise eurozone inflation close to its 2% target, has long proved contentious in the eurozone’s affluent northern states. Critics in Germany and the Netherlands argue that public debt purchases by the central banks of eurozone member states with ECB funding amounted to monetary financing of government spending by the ECB. This has been barred under EU law, so as to insulate the institution from political pressures. QE advocates refute the claim, insisting that the ECB was buying bonds from investors in secondary markets, not directly from governments. They also point to the self-imposed cap on its holdings of up to one-third of the debt of any country and to acquire sovereign assets in proportion to the size of the economy, as measured by the share of ECB capital. These constraints are intended as safeguards against potential defaults by member states.

Significantly, the Karlsruhe court last week did not think the ECB debt purchases amounted to direct financing of governments. This is a setback for the plaintiffs, who include Berlin’s conservative academics, lawyers and the populist Alternative for Germany (AfD) party. But crucially, they were not deterred by an earlier defeat over the legality of the Outright Monetary Transactions, the 2012 predecessor to QE that was never availed. Indeed, they would regard the court’s recent insistence of a justification of QE as marking a relative success over its 2017 refusal of a temporary halt to the programme, out of concern that Germany’s withdrawal would hurt the ECB policy goals.

Squabbling over rescue package

Germany’s monetary hawks moreover have their eyes set on the distorted real estate prices from the prolonged negative interest rates in the eurozone and the impact on lenders and pension funds to continue their assault on QE. The Karlsruhe decision is believed to have no direct bearing on the ECB’s expansion of asset purchases by another €750 billion of bonds under the so-called pandemic emergency purchase programme until the year-end in response to COVID-19. But the removal of the ceiling to acquire no more than one-third of a country’s debt could potentially expose the institution to fresh legal challenges. The sustained attacks on the lender of last resort should serve as a wake-up call for eurozone leaders who are squabbling over the bloc’s rescue package for the post-pandemic recovery. Moves to mutualise the bloc’s debt acquire greater urgency than ever, as also calls for governments to infuse a bold fiscal stimulus.

The ECB has said it will continue its bond-buying programme, regardless of the implications arising from the Karlsruhe court ruling for the principle of central bank independence. The decision also raises fundamental issues concerning the primacy of common EU laws at a juncture when the bloc is beset with eurosceptic and populist challenges from member states. In the wake of the decision in Germany, the ECJ has emphasised its authority as the ultimate arbiter in all EU disputes.

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Printable version | Jun 7, 2020 12:08:37 AM |

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