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AFTER THE DECISION OF THE KARLSRUHE COURTThe ECB is getting ready for life without the Bundesbank

MIHAI GONGOROI
English Section /

The ECB is getting ready for life without the Bundesbank

The European Central Bank is taking under consideration the bringing of an infringement proceeding against Bundesbank 

The European Central Bank (ECB) is currently drawing up back up plans to resume its bond purchase program, amounting to several trillion Euros, without the German central bank (Bundesbank), if the German courts force the Bundesbank to withdraw from this program after last week's decision of the Karlsruhe Constitutional Court, several sources close to the case told Reuters.

In the most pessimistic scenario, the ECB is taking under consideration bringing a lawsuit against the German Central Bank, the biggest shareholder of the ECB, to force the Bundesbank to resume activity in its bond purchase program, according to the sources. The launch of the infringement procedure against Bundesbank, and unprecedented measure, would however mean "a moment of truth" for the Euro, testing Germany's commitment to the currency which it has played a significant part in and forcing the German politicians to address in a decisive manner some of the doubts concerning the policies of the ECB.

The German Constitutional Court has given the ECB until the beginning of August time to justify its government bond purchase program, or to continue the scheme (PSPP) without the Bundesbank, which, according to the current plans and limitations, should be responsible for more than one quarter of the total bonds purchases in the program.

Most sources quoted by Reuters expect the objections raised by the German Constitutional Court to be solved by the Bundesbank itself, which will prove that the bond purchase is an adequate policy and will answer the concerns over the secondary effects of this program.

Even so, the ECB staff as well as the employees of Eurozone central banks are preparing for a scenario which a source has qualified as "unthinkable", a scenario according to which the German Constitutional Court will prohibit the Bundesbank from participating in the bond purchase program.

In such a case, the ECB or (less likely) the other central banks in the Eurozone will take over the segment of purchasing of German bonds that falls to the Bundesbank as part of the Public Sector Purchase Programme, the sources quoted by Reuters said, which have said that the plans have not been yet completed and not yet been discussed on the board of governors of the ECB.

If the other central banks end up buying German bonds, it would also violate the "no risk-sharing" principle that the Bundesbank insisted on at the launch of the PSPP program in 2015, which aims for every central bank in the Eurozone to buy only bonds issued by their own national governments.

In April, purchases of German bunds by the Bundesbank amounted to 628 million euros, or 2.3% of total government bond purchases made last month under the PSPP program. Bund purchases slowed further last month, with the ECB focusing on Italian bonds, which saw their yields increase significantly amid the negative effects of the pandemic on the Italian budget.

Even if the Bundesbank leaves the PSPP scheme, removing German bonds from the program is not an option, given that German bonds are a benchmark in the euro area for private investors, thanks to their top rating and the large number of securities outstanding on the secondary market. Moreover, the removal of Germany from the main program launched by the ECB would give rise to speculation about a division of the Eurozone, something the ECB has tried to avoid since the 2010-2012 debt crisis.

Meanwhile, in the event of the Bundesbank withdrawing from the PSPP scheme and the cessation of bond purchases following the Karlsruhe Court's decision, sources claim that the ECB is likely to launch an infringement procedure against the Central Bank of Germany on the grounds that it has failed to fulfill its obligations which it has under to the legal framework of the Eurosystem (as the Bundesbank is a member institution thereof).

If once again, the Bundesbank does not comply, the ECB could refer the situation to the European Court of Justice (ECJ), where the first such case since the creation of the euro in 1999 would be disputed. The Court has already ruled in favor of the PSPP program, in December 2018, saying that the ECB's acquisitions do not exceed the mandate given to the central bank by the European treaties, but the ECJ ruling was partially ignored by the German Constitutional Court which opened a new conflict between German and European institutions earlier this month.

So far, the German government has expressed optimism that any such negative scenarios can be avoided. Earlier this month, Chancellor Angela Merkel told key officials in her party that the problem was "solvable."

Isabel Schnabel, executive member of the ECB board: The exit of the Bundesbank from the program "will not take place"

In an interview given on May 25th and posted on May 27th, Isabel Schnabel, member of the executive board of the ECB, said that the decision of the German Constitutional Court "does not affect us directly" and that the ECB will not adjust its monetary policy in any way following the decision.

"The ECB is under the exclusive jurisdiction of the European Court of Justice and therefore this ruling of the German court does not affect us directly", said Schnabel.

She added: "It is addressed to the German government and the German parliament, which must now answer."

Schnabel also reminded the favorable ruling of the European Court of Justice of 2018 concerning the PSPP program, and said that it allows the ECB to continue its monetary policy in line with its mandate. "So we are not adjusting the monetary policy in any way in response to this decision", she said.

The ECB official also noted that Germany and the Bundesbank are important parts of monetary union, and when asked what the impact would be on the yields of German bonds if the Bundesbank ceased acquisitions, Schnabel replied that the Bundesbank's exit from the PSPP "will not happen".

"I don't think it will come to this. (...) We have to avoid a situation where a national central bank cannot participate in our assets purchases programs", said Schnabel, who added that she was sure that the Bundesbank is currently talking to the German government and parliament, and in the end a solution will be found. She also noted that the ECB can be constructive in supporting this process for the finding of a solution.

Von der Leyen, head of the European Commission: "The EU response to the coronavirus crisis amounts to 2.4 trillion Euros"

Romania would receive 19.6 billion Euros in European grants in response to the Covid-19 crisis

The European Commission wants EU member states to support a EUR 2.4 trillion package of economic recovery initiatives, European Commission chief Ursula von der Leyen said yesterday.

The EU executive's proposal includes several intervention instruments to help Member States: a EUR 750 billion recovery instrument (the Next Generation EU initiative), combined with a future revised EU budget of 1,100 (multi-annual - ed. note) billion euros". According to the EC president, the plan is an "urgent and exceptional need for an urgent and exceptional crisis".

The President of the European Commission said on Wednesday that the new initiatives will join an already agreed package worth 540 billion euros. "In total, this will bring our recovery effort to 2.4 trillion euros," said Ursula von der Leyen.

According to the plan presented on Wednesday, the European Commission would like to mobilize a total amount of 750 billion euros through the Next Generation EU initiative, of which 500 billion euros in the form of grants or grants, and 250 billion euros in the form of of loans.

Out of the 500 billion in grants, Romania would receive 19.6 billion euros, according to a chart of the top 10 eligible countries in which Romania ranks 7th.

Italy would receive the most money, respectively 81.7 billion euros, Italians being the hardest hit by the Covid-19 crisis. Next in terms of EU-allocated money are Spain (77.3 billion euros) and France (39 billion euros), with Greece set to receive 22.5 billion euros.

The money will be raised from the financial markets through 30-year joint bonds and will start to be paid in 2028, after the end of the next multi-annual exercise. The repayment of principal and payment of interest would thus end in 2058.

However, this plan could be hit by the reluctance of some member states, mainly the "group of 4 frugal countries", the Netherlands, Denmark, Austria and Sweden, which would prefer to support the EU economy only through loans, rather than grants.

The European Commission has forwarded the proposal to the European Parliament and the EU Council, which have to approve it. The European Commission's project will be on the agenda of the next European summit on June 18-19. (M.G.)

The Eurozone economy is likely to decline between 8% and 12% this year due to the impact of the coronavirus pandemic (COVID-19), European Central Bank (ECB) President Christine Lagarde said on Wednesday, according to Reuters, quoted by Agerpres.

The ECB had previously estimated a decline of between 5% and 12% for 2020, but Lagarde warned that the "moderate" scenario is already outdated and "medium and severe scenarios" are currently being considered.

According to the spring economic forecast, published on May 6 by the European Commission (EC), the Eurozone is expected to post a record contraction of 7.7% this year, with a growth of 6.3% in 2021.

The European Union (EU) economy will shrink by 7.4% in 2020, but will advance by 6% next year

(M.G.)

DANIEL DĂIANU, FISCAL COUNCIL:

"Future bond purchases should be accepted, amid the pandemic"

Bond purchases which are going to be made should be approved, given the situation caused by the Covid-19 pandemic, says Academy member Daniel Dăianu, chairman of the Fiscal Council.

In his opinion, the existing dispute should remain as a difference of opinion that needs to be clarified - the ECB should ask the Bundesbank to get clarification on the ruling of the Constitutional Court -, and what is to be done from now on is for the bonds purchases to be accepted, amid the Covid-19 situation.

Daniel Dăianu says: "I don't think it will come to the Bundesbank no longer being part of the bonds purchase program. Especially since these are future bond purchases. A distinction can be made between the old program and future acquisitions. It is possible that the dispute will remain, but when it comes to the new program, justified by the Covid-19 crisis, an understanding can be reached. It is a technical dispute, but one that can be resolved. I do not think that a plan B will be reached that does not involve the Bank of Germany in this program. However, the ECB operates through its components and the Bundesbank is part of the Eurozone system.

I do not think that the European judiciary, if this case reaches the CJEU, will declare the infringement against the Bundesbank. It is very difficult to believe the scenario that Germany could withdraw from this system. I believe that the Bundesbank will be asked to give assurances that from now on there will be no problems of constitutionality in terms of the actions it will take. I think that is the compromise formula. "

Daniel Dăianu stresses that either way, a precedent has been created "which has plenty of reasons to give us pause": "ECB operations should be judged in terms of the possibility of achieving their inflation target. That is shrinking in the context of the Covid-19 pandemic. The Bundesbank is required to participate in the bond purchase. If the German Central Bank were banned from participating in this procedure, then the system would no longer function properly and those other central banks would be forever forced to buy Germany's take, which is inconceivable. I don't think it will come to that".

According to the economist, the Bundesbank is a founding member of the ECB and it is not at all a good thing for it to have a relationship of conflict with the European Central Bank. (Emilia Olescu)

CĂLIN RECHEA, ECONOMIC ANALYST:

"It is hard to believe that the ECB can continue quantitative easing without its largest shareholder"

The absurd theater takes a bow and admits its insignificance when faced with the prospect of the German Central Bank being sued by the European Central Bank, says former banker Călin Rechea, analyst at BURSA. "

It is hard to believe that the ECB can continue the quantitative easing program without its largest shareholder, even if the latest official statements show that the Pandemic Emergency Purchase Program (PEPP) can continue by ignoring the capital key, which shows that the volume of purchases must comply with the proportion of the stake in the formation of the capital of the ECB and the cap on the acquisition of the bonds of a specific state to one third of the total issue.

These two parameters have had a capital importance for the recognition of the legality of the previous easing program, Public Sector Purchase Programme (PSPP), by the EU court of Justice".

Without the compliance with those limitations, the continuation of the PEPP represents a flagrant violation of the European treaties, which prohibit the financing of budget deficits through money printing, Călin Rechea says.

"This violation of the fundamental rules of the EU represent more than a «simple» opening of the path for future «lawlessness», which will soon be noted by the mere citizens of the Union, because it shows the impotence of the traditionally accepted monetary policy instruments, as well as the impotence of an institution that has demonstrated that absolute power corrupts absolutely".

ADRIAN VASILESCU, NBR:

"The Bundesbank cannot violate the decision of the Constitutional Court"

The decision of the German Constitutional Court, which gave the European Central Bank until early August to justify its government bond purchase program or to continue the bond purchase scheme without the Bundesbank, cannot be violated, according to Adrian Vasilescu, consultant for strategy within the National Bank of Romania (NBR)

He told us: "I always have big doubts when it comes to anonymous source-based news. What I can say, however, is that we are talking about a decision of the Constitutional Court that the Bundesbank cannot violate. So the Central Bank of Germany will not be able to participate in the bond purchase, but that does not mean that the Bundesbank will leave the system. It is a decision that is difficult for Germany, but given that there is this verdict that stops it from participating in such operations, it means it will not participate in the bond purchase. "However, the Court 's decision will not stop Europe from participating in this procedure."

The German Constitutional Court has ruled that the euro area quantitative easing program, launched by the ECB in 2015, has no support in the European treaties and is only partially constitutional in Germany. The decision was adopted by 7 votes to one, with judges of the Karlsruhe Court granting the ECB three months to resolve the legal issues of the quantitative easing program.

The lawsuit at the German Constitutional Court was brought by a group of businessmen and members of academia, who argued that the ECB's programs are not limited to monetary policy, but rather represent an inappropriate involvement in economic policies. (E.O.)

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AURELIAN DOCHIA, ECONOMIST:

"I don't think the possibility of the European monetary policy being stopped is likely"

It is very unlikely that the European monetary policy being stopped is being debated, says economist Aurelian Dochia, who said that it happening would "overturn the entire logic of the system". The expert told us: "The German Constitutional Court presents some legal issues. We have seen legal experts who do not agree that it is within the functions of the Regional Constitutional Court to issue rulings on such a matter and obviously the ECB thinks that it is not opportune to halt the monetary operations it has under way because of this decision. I think that things will remain up for discussion and I don't think the possibility of the European monetary policy being stopped is likely, because in doing so overturn the entire logic of the system. If we look at the decision made by Constitutional Court it is under no circumstance one that says it needs that the operations should no longer continue. The ruling of the Court simply asks for a justification for those operations, which is a different story". There is no such impediment for those ECB operations to continue, says Aurelian Dochia, who mentions that it is absolutely obvious for everybody that if the structure of the ECB were placed in doubt, then the entire European construction would fall apart.

"We are talking here about a decision of the Constitutional Court, not about any of the central banks exiting the system, that is not being even being considered. This thing would only be considered at the time where a country would leave the Eurozone", the economist concluded. (E.O.)

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