ECB Stalled by Dokheonjae: "Must Prove Legitimacy of Public Bond Purchases"

[Image source=AP Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] The German Constitutional Court has put a brake on the European Central Bank's (ECB) quantitative easing (QE) policy, the Public Sector Purchase Programme (PSPP). It demanded that the ECB prove the legitimacy of the PSPP within three months, stating that there was no thorough analysis on whether the PSPP was an appropriate measure for the Eurozone member countries' economies. This is expected to become another adverse factor that fuels conflicts in Europe, which has shown signs of division during the economic policy response to the novel coronavirus disease (COVID-19).

According to the Wall Street Journal (WSJ) and others on the 5th (local time), the German Constitutional Court ruled that the German government and parliament failed to closely examine the operation of the ECB's PSPP, issuing a partial ruling of unconstitutionality. The court stated, "The ECB should have evaluated the impact of the QE policy on the overall economy, including shareholders, insurance policyholders, and taxpayers," and judged that the PSPP exceeded the ECB's monetary policy authority.

The PSPP is a program in which the ECB purchases public bonds such as government bonds and is a representative QE policy of the ECB. It was suspended after 2018 but resumed at the end of last year. To date, the scale of bonds purchased by the ECB through the PSPP exceeds 2 trillion euros (approximately 2,647 trillion won).

In Germany, criticism of the ECB's asset purchases has continued. The ECB's purchase of government bonds from Southern European countries such as Spain and Italy, citing the need to stimulate the Eurozone economy, sparked controversy over reverse discrimination. The logic is that while borrowing costs for these countries have decreased, the cost burden on Germany and some Northern European countries has increased. Discussions on this issue began in German courts in 2015. Earlier, in 2018, the European Court of Justice (ECJ) ruled that the ECB had the authority to implement the PSPP, a decision completely different from the current German Constitutional Court ruling.

Following this decision, the German central bank, Bundesbank, will suspend asset purchases through the PSPP for the next three months. If the ECB fails to prove the legitimacy of bond purchases during this period, Bundesbank will be excluded from the PSPP.

The problem is that if Bundesbank withdraws from the PSPP, the pan-European joint economic policy will suffer a serious blow. Considering Germany's status in the European Union (EU) economy, the possibility that the PSPP may not function properly cannot be ruled out. Bloomberg News evaluated, "ECB President Christine Lagarde said on the 30th of last month that efforts necessary to fight the COVID-19 crisis will continue," adding, "Since Bundesbank is the largest asset purchaser in the PSPP, Germany's participation is key to the success of QE." Henrik Enderlein, head of the Hertie School of Governance, commented, "This (court) decision places the ECB under the threat of limits to its independence," and "The ECB's influence will weaken not only in the market but also politically."

However, the German Constitutional Court added that the 750 billion euro asset purchase program announced by the ECB in March as a COVID-19 response is not subject to this ruling.

This content was produced with the assistance of AI translation services.