Christine Lagarde has fended off criticism of the European Central Bank’s government bond purchases, saying she was “undeterred” by an order from Germany’s highest court to produce a justification of its action.
Speaking publicly for the first time since its flagship bond-buying policy was challenged by the German constitutional court, the ECB president said the pandemic meant the Frankfurt-based institution — as well as other central banks — “have to go beyond the normal tools to use exceptional measures . . . to avoid a tightening [of financing costs] and to ensure our monetary policy is transmitted across the euro area”.
“We are an independent institution, answerable to the European Parliament, and driven by our mandate,” she said in a webinar organised by Bloomberg. “We will continue to do whatever is needed, whatever is necessary, to deliver on that mandate. Undeterred.”
Four ECB governing council members told the Financial Times on Wednesday that the ECB should not respond directly to the German court, arguing such a move would impinge on the central bank’s independence and expose it to pressure from other national courts. A majority of ECB council members oppose providing a justification, they said.
The constitutional court in Karlsruhe on Tuesday ordered the German government to ensure the ECB carried out a “proportionality assessment” of its purchases of government bonds to ensure their “economic and fiscal policy effects” did not outweigh other policy objectives. It threatened to prevent the Bundesbank, Germany’s central bank, from making further asset purchases if the ECB failed to comply within three months.
The German court stunned lawyers and legal scholars by partially rejecting a 2018 ruling by the European Court of Justice that ECB bond buying was legal. According to legal scholars it was the first time a national court had declared an ECJ judgment invalid and could undermine the uniform application of EU law, one of the bloc’s most important achievements.
“The court’s arguments are ridiculous and we could easily answer them in five minutes, but we absolutely should not do so,” said one member of the ECB council, who added that this view was shared by the 24 other members of the bank’s top decision-making body who held a conference call on Tuesday evening to discuss the judgment.
“What is the risk if we reply?” the council member asked. “When the time comes to raise interest rates, another court in a different country will challenge us — then what?”
“In my view we should not prepare any special response for the German court,” said a second ECB council member.
A third ECB council member said the German court ruling appeared to ignore vast amounts of analysis the central bank has done on the impact of its bond-buying, adding that during Tuesday evening’s call the idea was floated of highlighting the relevant documents on its website.
“As I understand it the respondents in the case, and the ones the court has addressed its order to, are the German government and parliament,” said one ECB council member. “We are going to carry on doing what we are doing. You are not going to get a formal response from the ECB.”
Luis de Guindos, vice-president of the ECB, reassured members of the European Parliament on Thursday that the central bank would not bow to pressure from the German constitutional court to rein in its monetary policy strategy.
He said the ECB did not “put monetary policy in a sort of ivory tower”, adding that it was “second to none in terms of transparency” because it was continuously assessing and explaining the proportionality of its policies.
“I have been crystal clear . . . that we are fully committed to do whatever is necessary and to put in place all the instruments and to recalibrate all the instruments in order to avoid fragmentation in the markets, and the first line of defence — as I said before — is the sovereign debt market,” he said.
Italian 10-year borrowing costs climbed above 2 per cent for the first time in almost two weeks on Thursday, having risen by 0.25 percentage points since the German court ruling that caused investors to worry it could constrain the ECB’s bond-buying programme.
Several ECB council members suggested that the Bundesbank could provide a proportionality assessment for its own national government or parliament instead of the ECB, according to several of those who were on the call. “The Bundesbank can reply to this through the finance ministry in Berlin,” said the first council member.
That would put Jens Weidmann, president of the Bundesbank and a member of the ECB governing council, in the awkward position of having to justify the ECB’s €2.2tn purchases of public sector bonds over the past five years despite having been one of the policy’s most vocal opponents on the council. The Bundesbank declined to comment.
The second council member said Mr Weidmann was “in a very difficult situation because he is caught between the constitutional court of his own country and the governing council of the ECB of which he is a member”.
“I would not be surprised if [German chancellor Angela] Merkel intervenes at some point to resolve it,” said the council member.