May 5, 2020 / 12:00 PM / 25 days ago

Breakingviews - ECB firefighters can circumvent German roadblock

President of Germany's Constitutional Court Andreas Vosskuhle reads the verdict of the court about the attempt by the country's 16 federal states to ban the far-right NPD in Karlsruhe, Germany, January 17, 2017.

LONDON (Reuters Breakingviews) - Germany is challenging central banker autonomy in order to defend it. Judges at its top court ruled on Tuesday that the Bundesbank would have to stop participating in a long-standing bond buying programme unless the European Central Bank could show it was needed. This won’t stop ECB boss Christine Lagarde forging on with her immediate efforts to lift the euro zone economy out of a virus-induced slump. But it does raise more fundamental questions about the ECB’s cherished independence.

The German ruling on the ECB’s government bond buying scheme, launched in 2015, gives Lagarde’s economists three months to prove that the scheme didn’t have disproportionate economic and fiscal policy effects. That won’t be easy. Academic opinion is split, with a group of German scholars bringing the case to court. And all the ECB’s submissions have so far failed to cut the mustard in the eyes of the national court.

Still, the court ruling need not become a spoke in the wheels of current policymaking. If the Bundesbank withdrew, other national central banks and the ECB itself can take up the slack. Less than a quarter of ECB asset purchases in April were made under the 2015 scheme. The new Pandemic Emergency Purchase Programme, which accounted for the majority, did not fall under the scope of the court ruling and any legal challenge to it would take years to wend its way through the legal system.

The ruling is still problematic, though. It raises questions about whether the Bundesbank, the central bank of the euro zone’s largest economy, can fully take part in the execution of monetary policy in the future and how any new bond buying programmes would be designed. That reduces investors’ faith in ECB scope to act as decisively in the future as it did in the past, as demonstrated by the drop in the euro’s exchange rate and the rise in Italian bond yields on Tuesday. Most of all, it raises the prospect that ECB independence may face its biggest test from German judges telling it what it can’t do rather than politicians pressing it to do more.

Breakingviews

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