Time for EU fiscal stimulus

Time for EU fiscal stimulus

Context

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.

Quantitative Easing

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.

Germany Court

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.

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.