The second monetary dialogue this year between ECB President Christine Lagarde and the ECON Committee started with bleak prospects: as the latest ECB forecast, Lagarde presented the “middle scenario”; hence, neither the severe nor the mild one. Accordingly, the ECB assumes a recession of 8.7 % in the eurozone for all of 2020. The projected decline is thus steeper than the 7,7 % the Commission had projected in the Spring economic forecast.. The ECB forecasts economic growth of 5.2 % for 2021, and 3.3 % for 2022.

 

Instrument for bond purchases will be increased and extended

At the beginning of the Coronavirus crisis and in response to frozen economic activity, the European Central Bank provided liquidity to prevent disastrous speculations on financial markets: on 18 March 2020, the “Pandemic Emergency Purchase Programme” (PEPP) was decided as an immediate monetary measure, which came into effect on 26 March.

 

Christine Lagarde confirmed to the ECON Committee both the increase and extension of the Coronavirus emergency measure PEPP. In addition to 750 billion euro, which had been decided in March, the ECB wants to intervene on the capital market by providing another 600 billion. Hence, the total volume of the instrument increases to 1,35 trillion euro. The term of these bond purchases shall be extended until June 2021 and end, if the ECB Council declares the crisis to be over, at the earliest. By purchasing mainly government bonds, but also corporate bonds, the ECB provides an “important monetary policy impulse”, which was, according to Lagarde, carefully targeted, effective and proportionate. The purchases stabilise the financial markets at a constant zero interest rate and secure the liquidity of banks, which in turn are able to continue their role as lenders for businesses and households. In addition, States are able to borrow money on the capital market at similar conditions.

 

Majority of MEPs praise ECB’s response

The majority of MEPs of the ECON Committee praised the ECB’s quick response to the crisis. Even though there was some criticism of too flexible purchase limits and the non-respect of capital keys, it was actually due to the unstable architecture of the European Economic and Monetary Union and the unready capital market union that the ECB once again had to act as a fire extinguisher of the first hour. MEPs saw it as a duty of the EU institutions to ensure a robust and long-term European tax and fiscal policy at last. In the AK’s opinion, this above all requires measures against tax avoidance by international corporations and the creation of a Golden Investment Rule to provide the public sector with greater budgetary scope.

 

Reactions to the Karlsruhe ruling

At the beginning of May 2020, the ruling of the German Constitutional Court had caused a stir as the Karlsruhe judges declared ECB bond purchases as partly unconstitutional. The ruling referred to the “Public Sector Purchase Programme" (PSPP) from 2015, during the course of which the ECB – to stabilise the inflation rate – had bought government bonds. The European Court of Justice declared the purchases to be in conformity with the law in December 2018. However, in the eyes of the German Constitutional Court the question of the proportionality of the ECB purchases has not been sufficiently clarified. Responding to the questions of several MEPs, Lagarde pointed out that the ruling did not refer to the current bond purchases and called to mind that the ECB was first and foremost subordinated to ECJ jurisdiction. From the AK’s point of view, this ruling must also lead to a discussion on changing the European treaties to be able to enforce a solidary, ecological and democratic solution to the economic crisis in Europe triggered by the Corona virus, for example the introduction of Coronabonds.

 

Cash injections for contaminators?

The ECB also purchases corporate bonds within the scope of the PEPP programme. Even though supporting a sustainable orientation of European fiscal policy is also part of the Green Deal, bonds of Shell and other fossil energy companies were bought that even paid dividends to their shareholders. Responding to the question of many MEPs on how this would be compatible with the guidelines of a sustainable financial economy, Lagarde only said that the ECB would recommend refraining from paying dividends. There was currently also a lack of data on “brown”, hence contaminating assets. Within the framework of its mandate, the ECB would be committed to supporting sustainable finance and referred to the pioneering role of the euro in case of “green bonds” compared to other currencies. These issues shall be addressed in future dialogues and in the ECB’s strategic reviews.

 

Further information:

AK EUROPA: European Central Bank announces strategic review

A&W blog: Not in good shape for the Euro crisis 2.0 – why a solidary crisis policy needs new EU treaties

A&W blog: 1,500 billion for a European Marshall Plan – (how) can this be financed?