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Don’t start your summer holiday too soon. Mr. Weidmann’s hour has come at last. For while markets are tuned out, decisions taken by Jens Weidmann inside the Bundesbank this weekend—perhaps revealed next week—could be the most important of his and the euro’s life.
Indeed, the consequences will reverberate across the Eurosystem.
Let’s recall how we got here. In early 2015 the ECB initiated the asset purchase program (APP) including the public sector purchase program (PSPP.) The ECB’s “accounts” or minutes were initiated at the same time.
Let’s recall how we got here. In early 2015 the ECB initiated the asset purchase program (APP) including the public sector purchase program (PSPP.) The ECB’s “accounts” or minutes were initiated at the same time.
Together with the legal Decision underpinning the PSPP, they make the legal case for these asset purchases. The legal Decision of March 2015, for example, note that, “The PSPP is a proportionate measure for mitigating the risks to the outlook on price developments…”
and asserts that “The PSPP contains a number of safeguards to ensure that the envisaged purchases will be proportionate…”
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015D0010&from=EN
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015D0010&from=EN
That said, the accounts of the policy meeting initiating the APP/PSPP provide some justification for the various limits on the program. For example, on the decision between buying only AA rated securities or the full range of investment grade government debt
...(i.e., everyone but Greece), “on the basis of ECB staff analysis and the work carried out by Eurosystem committees, the first option was considered to be less effective in the current environment.” https://www.ecb.europa.eu/press/accounts/2015/html/mg150219.en.html
In short then, there was discussion and deliberation of various trade-offs, but many of the precise justifications were skimmed over or hidden from public view. It seems likely the direct impact on peripheral yields of allowing a wider universe of bonds was preferable ...
... to trickle down portfolio rebalancing, for example. But that sounds bad. And the ECB is not there to close the spreads, remember?
(Curiously, the former could have had hugely different implications for TARGET2 if that’s your bag.)
(Curiously, the former could have had hugely different implications for TARGET2 if that’s your bag.)
Anyway, all was well for a while. But a series of legal challenges against the ECB’s policies in general, and PSPP in particular, were fed at snail’s pace through the European and Germany system until in March this year ...
... a ruling from the German Constitutional Court (Karlsruhe) on the 2015 bond buying was expected. In fact, due to COVID-19 the ruling was delayed. But only until May 5th, the day before the retirement of the Court President Voßkuhle.
Karlsruhe could not find any violation of monetary financing. But they did consider the European Court of Justice (ECJ) was acting beyond its authority (ultra vires) in their assessment of the proportionality of the ECB’s PSPP.
Indeed, their review was apparently “not comprehensible”—an amusing claim by an institution whose legal texts creates a sandpaper sensation on the eye.
https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2020/bvg20-032.html;jsessionid=6368445B347023DBD64CE7F0A470C4C8.1_cid361
https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2020/bvg20-032.html;jsessionid=6368445B347023DBD64CE7F0A470C4C8.1_cid361
Most important, since Karlsruhe’s legal authority only reaches within Germany there was a dressing down of German institutions. And since they have no authority over an independent ECB, they directed ...
... the organs of German government to “take steps seeking to ensure that the ECB conducts a proportionality assessment.” And in the future they also “have a duty to continue monitoring the decisions of the Eurosystem on the purchases of government bonds under the PSPP.”
Moreover, they set a three month deadline for this to be sorted out, after which “the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council ...
... adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme.”
Now “proportionality” is a uniquely European thing. It may be at the EU level the equivalent to “fundamental misalignment” of exchange rates at the IMF. Easy to say, difficult to show. https://ec.europa.eu/regional_policy/en/policy/what/glossary/p/proportionality
And so, since May the clock has been ticking towards the Karlsruhe deadline of August 5th. If the ECB has not demonstrated proportionality, the Bundesbank’s participation in the PSPP would be illegal.
What happened next? Well, at first the ECB asserted its independence. And in any case “when preparing, deciding on and implementing the PSPP and its other monetary policy measures, the ECB has always analysed their effects and side effects and weighed them up against each other.”
But the ECB also apparently engaged in contingency planning to deal with the possibility that Bundesbank purchases stopped, whereby other NCBs would buy these bunds instead. https://uk.reuters.com/article/uk-ecb-policy-bundesbank-exclusive/exclusive-ecb-prepares-for-the-worst-life-without-the-bundesbank-idUKKBN2321LY
Meanwhile, the German parliament, led by none other than Wolfgang Schäuble—remember him?—began deliberating how to meet the requirements of GCC without compromising the independence of either the Bundesbank of the ECB.
Indeed, “Schäuble saw it as his duty to comply with the request addressed to the Bundestag.” https://app.handelsblatt.com/politik/deutschland/bundestag-schaeuble-zieht-umsetzung-des-karlsruher-ezb-urteils-an-sich/25850876.html?ticket=ST-13401277-j9TxGYhtlNLJPmXRWslN-ap1
After a series of public hearings and closed doors committee meetings, Bundestag apparently decided there was not much they could do on their own.
But then a deal was presumably brokered whereby, first, the ECB would go all in ...
But then a deal was presumably brokered whereby, first, the ECB would go all in ...
... talking about proportionality in the accounts of the June meeting; while, second, the ECB would provide to the Bundesbank a series of documents to be passed to the German government which they claim provided the justification for the proportionality. https://uk.reuters.com/article/uk-ecb-policy-court/ecb-to-release-documents-to-defuse-german-court-challenge-idUKKBN23V2VH
The accounts of the June meeting were the longest on record and made numerous attempts to weight the costs and benefits of policies and mention proportionality. But ...
... “Overall, there was broad agreement among members that while different weights might be attached to the benefits and side effects of asset purchases, the negative side effects had so far been clearly outweighed by the positive effects ..."
In the meantime, excited by the receipt of documents from the ECB, within 24 hours the German Finance Ministry passed them onto the Bundestag with a thumbs up. And the Bundestag took 4 days to agree all is well. However, of 8 documents provided by the ECB, 3 are secret documents
With this, the proportionality review by German institutions has been completed. There are two concerns here, of course. The first is substance: was proportionality adequately assessed both by the ECB and then by the German bodies?
The second is process: do the ECB monetary policy accounts from June count as a “decision” as required by Karlsruhe?
Which brings us back to this weekend, days ahead of the August 5th deadline, and Weidmann’s dilemma.
Which brings us back to this weekend, days ahead of the August 5th deadline, and Weidmann’s dilemma.
Now my personal view on this is quite simple: the ECB should be allow to buy what it likes, when it likes, and forget about any capital key and all that nonsense. So let’s state that up front.
But the situation facing the Bundesbank President is a little more nuanced. Indeed, despite desperate efforts to put in place careful controls on bond buying these rules have been gently eroded.
It no surprise that ZEW recently reminded us of these facts ahead of this decision. https://www.zew.de/en/press/latest-press-releases/disproportionate-purchase-of-high-debt-country-bonds-even-before-the-covid-19-crisis
Naturally, part of this bond buying trend is due to German fiscal policy, which is where many of the challenges of the euroarea lie. But don’t try and explain this to the Bundesbank.
So monetary policy was already drifting away from the rules. And now COVID-19 and the PEPP, which further eroded such checks and balances. Even Greece has been included!! The Eurosystem and monetary policy has been taken over by the French, the Bundesbank has been marginalized...
But there is a bigger picture concern here about how German institutions have dealt with the demands from Karlsruhe. Both Jurgen Stark and the plaintiff’s lawyer in the case noted, the ease with which the proportionality assessment was waved through is an affront to the Court.
But in any case, GCC Judge Huber has shifted emphasis to the Bundesbank in providing the final say on the proportionality matter. It's really for Weidmann to decide. And Weidmann has been ominously silent on the matter.
Is the pig circus cooked up by the ECB and German government enough to justify proportionality against a backdrop of ever looser rules on bond buying? Or is it too much for Weidmann to rock the boat?
Weidmann has an easy out, however. The plaintiff in the case will almost certainly submit to the Karlsruhe on Thursday a demand that Bundesbank PSPP purchases should be stopped. Then the judges will themselves have to decide. https://www.tichyseinblick.de/daili-es-sentials/das-grenzt-an-eine-verhoehnung-des-verfassungsgerichts
But since they have indicated they are looking to Buba for the final judgment, if Weidmann lets this pass they might take this as implicit acknowledgment that all is well with euroarea monetary policy.
But if Karlsruhe indeed stand down then Weidmann has lost an historic opportunity to regain control of the checks and balances that once formed the foundation of euroarea monetary policy.
Instead, the ECB will have been hijacked by the periphery via Paris. He can go back to making speeches in Austria about the importance of “boundaries” in asset purchases. But no one will listen. https://www.bundesbank.de/en/press/speeches/united-in-diversity-809338#tar-3?e=36404
And so we are entering what might be one of the most important weeks in the history of the euro project. But no-one even cares!
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h/t @Musso___
