The European Central Bank has sought to resolve its stand-off with Germany’s highest court by publishing details of the debate its governing council held on whether its bond-buying excessively impinged on economic and financial policy.
Minutes of this month’s ECB meeting were published on Thursday and showed that its council members debated the pros and cons of its monetary policy. The ECB said there was “broad agreement” that the “negative side effects had so far been clearly outweighed by the positive effects of asset purchases on the economy in the pursuit of price stability”.
But it said that “it could not be ruled out that unintended effects could increase over time and outweigh the overall positive effects”, adding that it was “important to continuously assess the effectiveness and efficiency of the monetary policy measures, their transmission channels and their benefits and costs”.
The move could help to defuse a legal impasse with Germany’s constitutional court, which shocked much of Europe by ruling last month that Berlin officials and the EU’s top judges had not done enough to properly scrutinise the eurozone’s flagship bond-buying programme.
The court ordered the German government and parliament to ensure that the ECB provided a “proportionality assessment” of its €2.2tn sovereign bond-buying scheme.
In response, the ECB plans to provide some unpublished documents to the Bundesbank so it can pass them to the German government and parliament, which could hold a debate on the issue as early as next week. The documents will include minutes of past meetings at which the ECB discussed buying sovereign bonds before it launched the policy in March 2015 and before it started publishing official accounts of its meetings that year.
The ECB has for years published an official account of its council’s discussion three weeks after every monetary policy meeting but this month’s event was unusual because the council spent a significant chunk of the meeting discussing the benefits and pitfalls of its policies.
Morgan Stanley analysts said: “We now see a reduced risk of the German constitutional court ruling constraining the ECB’s ability to buy government bonds when the inflation target is not met.”
At this month’s meeting, which did not specifically mention the German court ruling, ECB chief economist Philip Lane told his fellow council members that its bond-buying programme was “an effective tool for delivering on the treaty-assigned price stability objective in the current environment”.
As for the risk that monetary policy impinges excessively on economic and fiscal policy, the ECB said it guarded against this with its self-imposed limits on bond purchases, including a commitment not to buy more than a third of a country’s eligible debt and to only buy sovereign bonds in proportion to an economy’s size.
In recent months the central bank has vastly expanded its quantitative easing programme of bond-buying with a new €750bn emergency asset-purchase scheme, which it recently expanded to €1.35tn, to combat the economic impact of the pandemic.
Critics complain that this emergency bond-buying programme is not bound by the same limits as its earlier ones. But the ECB argues that it has more flexibility because it is a temporary crisis-fighting scheme.
Some members of the ECB council argued that “the combination of a very expansionary monetary policy with potentially unsound or unsustainable fiscal policies could undermine the foundation of a credible monetary policy”, the minutes showed.
The critics — who people briefed on the matter said included Bundesbank president Jens Weidmann — argued the ECB should “embed safeguards” in all its asset purchases, including its new scheme, to avoid these risks.
There was also a debate between council members over the size of the expansion to its emergency bond-buying programme. Should there be “significant upside surprises” in the economic outlook, the full €1.35tn would not be spent, the ECB said.
The central bank acknowledged that low interest rates could incentivise excessive risk-taking, damage the profitability of banks, reduce earnings on deposits for savers and lead to misallocation of resources to “inefficient firms”. But it said these “challenges” were caused by the “structural factors driving the decline of interest rates” and while its monetary policy contributed, it was “clearly not the main factor”. It added that “there was no convincing evidence that the low interest rates had contributed to so-called zombie lending”.