The European Central Bank (ECB) has met the principle of proportionality with its flagship stimulus programme, Germany’s finance minister and lawmakers said, ending a legal conflict that threatened to undermine central bank policy.
The response to a shock ruling by Germany’s top court last month lifted uncertainty about stimulus measures introduced by the ECB in 2015 as well as about the bank’s independence and the euro’s future.
The Constitutional Court last month gave the ECB three months to justify bond purchases under the stimulus plan – the Public Sector Purchase Programme (PSPP) – or lose the German central bank as a participant.
As the Bundesbank is the biggest of the 19 national euro zone central banks and the ECB’s top shareholder this would have raised questions about Germany’s future in the euro and the very survival of the common currency.
In a June 26 letter, a copy of which was obtained by Reuters on Monday, Finance Minister Olaf Scholz told the head of the lower house of Germany’s parliament, the Bundestag, that the ECB had shown “plausible proportionality with regard to the PSPP” and “fully complie(d)” with the court’s requirements.
The ministry had reviewed ECB documents on the stimulus plan, passed on by the Bundesbank, and held numerous talks with the ECB and the Bundesbank in recent weeks, Scholz wrote.
“In our view, the Bundesbank is allowed to participate,” Scholz wrote.
In its May 5 ruling, the court urged the German government and parliament to challenge the ECB on the stimulus and raised questions on its effects on savers and fiscal discipline.
The documents sent by the ECB showed its staff had taken some of these concerns into account when it was preparing to launch the stimulus scheme in 2014-15 but concluded that its benefits outweighed costs.
ECB staff also outlined alternatives, such as only buying government bonds with the highest rating like Germany’s, but feared this could fall short of the desired effect for financial markets and inflation.
The documents, which were labelled confidential before being sent to the Bundestag, also showed ECB staff had some misgivings about giving in to the Bundesbank’s main demand at the time: making each national central bank bear the risk of the domestic government bonds it bought.
This was eventually accepted and has been a key tenet of the PSPP ever since.
“Perceptions of weak Eurosystem cohesion may well underwhelm markets and create a backlash that would undermine the progamme,” ECB staff told policymakers in a presentation in the run-up to the policy decision.
In a draft document, Bundestag lawmakers also concluded that the ECB had fulfilled requirements demanded by the court for proportionality with the stimulus programme.
The ministry and Bundestag should coordinate their response to the court, Scholz said, adding that he intended to make a submission to the court at the end of this week.