Lane hints at way ECB can skirt German court ruling
THE European Central Bank (ECB) is not bound by strict country quotas when it buys bonds in the markets, chief economist Philip Lane has told a high-powered finance conference.
The remarks may hint at a way the ECB can skirt a crisis if Germany’s top constitutional court carries through on its threat to block the country’s role in the ECB’s main quantitative easing (QE) policy, known as the Public Sector Purchase Programme (PSPP).
Under the ECB’s so-called capital key, bond buying is done largely by each member state’s central bank and in proportion to the size of each economy. Germany accounts for 25pc of bonds bought and other member states each contribute a smaller share.
Germany’s size makes its role crucial to the entire multitrillion-euro scheme.
Germany’s constitutional court this month gave the ECB until early August to show its purchases were justified, or said it will ban the Bundesbank, Germany’s central bank, from any further role.
On Tuesday, Prof Lane said the ECB can deviate from the capital key quotas when it and member states’ central banks buy bonds.
“The whole point of having flexibility is that you can deviate from the capital key,” Prof Lane told an online interview with the Institute of International Finance.
That would potentially allow Germany’s central bank to stop buying German bonds under PSPP and buy more of its own and other countries’ bonds under the PEPP scheme. Other member states could shift their purchases in the opposite direction, buying German bonds under PSPP to maintain overall spending.
Reuters reported on Tuesday the ECB is drafting contingency plans to carry on with QE if Germany is forced to quit the scheme, citing four sources.
In this worst-case scenario, the ECB would launch an unprecedented legal action against the German central bank, its biggest shareholder, to bring it back into the programme, said the sources, who spoke on condition of anonymity.
That case would be heard by the European Court of Justice in Luxembourg – whose views on the issue the original German court rubbished. The case would potentially test Germany’s political commitment to the euro institutions.
Most of the sources cited by Reuters expect the legal challenge from the court in Karlsruhe to be resolved by the Bundesbank itself demonstrating that the ECB had considered the proportionality of its policy .
But staff at the ECB and the eurozone’s national central banks are preparing for what one source described as the “unbelievable” scenario in which the court bans the Bundesbank from taking part in the purchases.
In that case, the ECB, or less likely the other eurozone central banks, would take up the Bundesbank’s quota in the PSPP and buy German bonds, the sources said.
They said such plans had not been finalised or officially discussed by the ECB’s Governing Council yet.
Spokesmen for the ECB and the Bundesbank declined to comment.