Abstract
ABSTRACT The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de facto independence of the European Central Bank (ECB). This article shows how a regular proportionality check could be integrated in the ECB’s strategy, which is currently undergoing a systematic review. In particular, it proposes that quantitative benchmarks for policy rates and the central bank balance sheet should be included. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided.
Highlights
The German Federal Constitutional Court (GFCC) ruled that the Deutsche Bundesbank would have to stop participating in the Public Sector Purchase Programme (PSPP) program within 3 months unless the European Central Bank (ECB) Governing Council substantiated that this principle is satisfied
The PSPP-ruling of the German Federal Constitutional Court (GFCC) and its call for applying the proportionality principle and communicating proportionality assessments have been the subject of some controversy
While the initial storm seems to have calmed down, it must be expected that the Pandemic Emergency Purchase Programme (PEPP) and other future ECB programs will be subject to further legal dispute
Summary
On May 5, 2020, the German Federal Constitutional Court (GFCC) issued a seminal judgement that has set off shock waves across the European Union (EU). The GFCC ruled that the Deutsche Bundesbank would have to stop participating in the PSPP program within 3 months unless the ECB Governing Council substantiated that this principle is satisfied. It requested the German constitutional organs – that is the German government and the German parliament – to take steps seeking to insure that the ECB explains its proportionality assessment. This would seem to be of particular interest as the ECB is currently conducting a formal Strategy Review that is to be completed by mid 2021 It would address the following request for continuous proportionality assessments that was raised in the ECB Accounts concerning the Governing Council meeting of June 3-4, 2020:. The Court will only revisit these questions in the context of further constitutional complaints
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