Public Sector Purchase Programme Research Articles

An assessment of the impact of the PSPP on Spanish public bonds

Purpose The purpose of this study is to analyse the impact of the European Central Bank’s (ECB) Public Sector Purchase Programme (PSPP) on Spanish sovereign debt. Design/methodology/approach The authors assess the impact of the PSPP on Spanish Government bonds from two different transmission channels (the signalling and the portfolio substitution) with two effects for each of them (the announcement and the expectation effects for the former and the stock and the rebalancing effects for the latter). The empirical study has been undertaken with event study methodology, controlled by macroeconomic variables, panel data and cross-sectional regression analyses. Findings The results show that both the ECB’s purchases under the PSPP and the announcements reduced Spanish Government bond yields. Compared to previous literature the Spanish Government bond yields reductions are larger than those for other countries. Research limitations/implications The authors’ approach to the impact of investors’ expectations is interesting, although they cannot draw evidence on this issue due to the lack of data. Practical implications From an economic perspective, the ECB can change economic agents’ expectations without actually carrying out any programme, only by announcing such a programme. Originality/value This paper contributes to the literature examining the PSPP from different transmission channels in Spain, taking into account the announcements, the expectations, the purchases and the variation in debt holdings relating to the PSPP from the beginning of the programme until 2020. Due to the large degree of heterogeneity across euro area countries, the results in this paper should improve our understanding of the relative differences in the impact of the PSPP and, thus, be of interest to academics and policymakers.

A Matter of Competence?

Abstract In the aftermath of the BVerfG’s controversial ruling on the ecb’s Public Sector Purchase Programme and the launch of an infringement procedure against Germany, politicians and legal scholars have called once more for the establishment of an “EU Competence Court”. Such a court would be the sole arbiter of competence disputes between the EU and its Member States. This article first recapitulates the current assessment of EU competences and its problems. Subsequently, it illustrates what the proposals to establish an EU Competence Court would entail and examines the different models they draw inspiration from by using a comparative approach. Ultimately, it is argued that none of these concepts stands up to closer scrutiny. Instead, the article uses further legal comparison to develop a two-tier solution: the first tier includes modifications to the cjeu’s decision-making process, while the second tier implements a new “constitutional advisory mechanism” to strengthen judicial multilogue.

Трансформация денежно-кредитной политики ЕС в условиях финансовой нестабильности

Challenges the European economy began to face 12 years ago raised the question about actions European Central Bank (ECB) have to undertake to maintain the financial sustainability, considering its objective to ensure price stability while coping with a changed economic environment. Provision that the ECB is obliged to take efforts to ensure financial stability as well as potentially serious consequences of crisis’ impact on the banking system and industrial production, led to an expansion of its role beyond standard monetary policy measures, with the unconventional steps being taken in addition to conventional to combat the adverse impact of the financial crisis. While reducing the interest rate, ECB also provided a cheap financial capital for banks via fixed-rate “Long Term Refinancing Operations” (LTROs), and three “Covered Bond Purchase Programmes” (CBPP). Purchases of debt securities were also conducted via “Securities Market Programme” (SMP) and, later, with then ECB’s President Mario Draghi declaring that ECB will do “whatever it takes to preserve the euro”, possibility of their increase was announced with the start of “Outright Monetary Transactions” (OMT) Programme. A mere announcement of the OMT was enough to calm financial markets, as none of the eurozone countries applied for financial support within this programme’s framework. Then ECB proceeded with a full-fledged quantitative easing, starting to buy sovereign bonds under its Public Sector Purchase Programme (PSPP), having spent 2.6 trillion € on its implementation. Understanding that a monetary union without an efficient banking union is unacceptably dangerous, the European Banking Union, under which supervision of largest eurozone banks has transferred directly to the ECB, was progressively established. While ECB’s anti-crisis policies achieved their goals, prolongation of the strategy it adopted may create new risks for the financial stability of the euro area, such as excessive dependence of credit institutions on monetary support and excessive inflationary risks under a zero interest-rate policy. Still, EU institutions’ coordinated financial management played an important role in overcoming the existing turbulence, with fiscal and monetary policy measures reinforcing each other.

Judgment of the German Federal Constitutional Court (2 BvR 859/15) on the Public Sector Purchase Programme of the ECB: An Interdisciplinary Analysis

On 5 May 2020, the Federal Constitutional Court of Germany announced in a momentous ruling that the Public Sector Purchase Programme (PSPP) of the European Central Bank (ECB) exceeds European Union (EU) competences. This decision initiated a lively debate in law and economics all over Europe. This article provides a unique interdisciplinary reading of the ruling in order to clarify the line of argument. Considering a cross-disciplinary view enlightens the understanding of the historic judgment. Ultra-Vires, European Court of Justice, German Federal Constitutional Court, Public Sector Purchase Programme, European Central Bank, Monetary vs. Economic Policy, Economic and Monetary Union

Models of Solidarity in the EMU. The Impact of COVID-19 After Weiss

Right in the middle of the Covid-19 pandemic, the German federal constitutional court (Bundesverfassungsgericht – FCC) issued a ruling that sent massive shockwaves through the continent. Not only did the Court question the legality of the European Central Bank’s bond buying program PSPP (Public Sector Purchase Program), but it also rejected the earlier decision by the CJEU in which this latter had found that program to respect EU law. The ruling is as such not directly concerned with Covid-19 measures, but it may have nonetheless important consequences thereon. In this contribution we will explore what those consequences may be. Apart from the direct effects on the ECB’s pandemic emergency purchase programme (PEPP), we zoom in on the ruling’s indirect consequences on the broader question of how to arrange solidarity in EMU. With regard to the latter, we contend that Weiss and the Covid-19 crises combined will test the basic models of solidarity the EMU relies upon: the models of individual fiscal responsibility, ECB based solidarity and the model of fiscal union. These models are assessed from economic, constitutional and democratic perspectives.

Judicialization of Economic and Monetary Union: between a rock and a soft place?

The European Central Bank has been active since the sovereign debt crisis that struck European Union Member States by putting in place several asset-purchasing programmes such as Outright Monetary Transactions and Public Sector Purchase Programme. As much as these decisions have proven the pivotal importance of this institution within the monetary union, they have also spurred controversy on potentially having exceeded the competences attributed to the Union. The german federal constitutional court heard challenges to both and requested the Court of Justice to decide on their validity within the framework of a preliminary ruling. The decision of the former court to declare the Public Sector Purchase Programme ultra vires —in this way countering the preliminary ruling decision— as well as its argumentation could produce many institutional consequences to both the European Central Bank and Court of Justice of the European Union. Finally, it has shown the limits of European Union integration and will inevitably propel discussions on which way to go in the future: it is time for this discussion to come out from courtrooms into the public sphere.
 Received: 11 November 2020Accepted: 26 May 2021

The Legal and Economic Questions posed by the German Constitutional Court’s decision in the Public Sector Purchase Programme (PSPP) Case

This paper seeks to explore the PSPP decision of the German Constitutional Court and its effect on the monetary policy decisions taken by central banks. It begins by exploring the decision and its effect in Germany, together with its wider implications for the European Monetary Union before moving onto consider the standard of review that should be applied by the Courts when they are required to review central banks actions. Conclusions are reached to show that any standard of review should be limited because of the unique economic and political circumstances in which central bank decision making takes place. Keywords: Central Banking; Judicial Review; Proportionality; European Law; European Monetary Union.

The European Central Bank and the German Constitutional Court: Police Patrols and Fire Alarms

In May 2020, a ruling of the German Federal Constitutional Court (FCC) questioned the legality of the Bundesbank’s participation in the European Central Bank’s (ECB’s) Public Sector Purchase Programme. Applying elements of a principal-agent analysis, this article analyses how the FCC ruling presents us with a new understanding of the relationship between the ECB, other EU institutions and Eurozone member states. Existing principal-agent analyses of the ECB focus upon its relations with other EU-level institutions and point to the limited ex ante control mechanisms and efforts to reinforce ex post control mechanisms—notably European Parliament oversight. The FCC ruling and the ECB’s reaction demonstrate the relative importance of national level controls over the ECB agent. This article understands the role of private plaintiffs in Germany as a form of ‘fire alarm’ on ECB policymaking against the background of weak ex post controls at the EU-level.

European integration: Quo vadis? A critical commentary on the PSPP judgment of the German Federal Constitutional Court of May 5, 2020

Abstract In its judgment of May 5, 2020, the Second Senate of the German Constitutional Court qualified for the first time a judgment of the Court of Justice of the European Union (CJEU)—C-493/17 Weiss—as “arbitrary from an objective perspective” and declared the underlying European Central Bank (ECB) decisions regarding the Public Sector Purchase Programme (PSPP) to be ultra vires. It requested the German Government and the German Parliament to take steps against the PSPP in its current form and to ensure that the ECB conducts a proportionality assessment of its PSPP. The judgment also prohibits the German Central Bank from participating, after a grace period of three months, in the implementation and execution of the ECB decisions at issue, unless the ECB assesses and substantiates that the measures provided for in its decisions satisfy the principle of proportionality. The present article, which was written by academics, lawyers, and civil servants from five countries, casts a critical eye on the judgment of the German Constitutional Court. It identifies significant shortcomings from both a German constitutional and a European Union perspective.

Proportionality and procedure of monetary policy-making

Abstract In a highly controversial decision, the German Federal Constitutional Court (FCC) decided that the Public Sector Purchase Program (PSPP) of the European Central Bank (ECB) was ultra vires because it violated the principle of proportionality. The FCC took a procedural approach to proportionality, finding that the ECB had failed to substantiate its balancing assessment. Therefore, the Court considered itself unable to review whether PSPP was substantively proportionate, but announced that it might do so in a future case. The judgment raises the fundamental question of how courts should review monetary policy. The article begins by exploring the role of central banks between independence and accountability. Then, it analyzes, in three steps, what role the principle of proportionality should play in the realm of monetary policy. First, I argue that a traditional substantive balancing test as part of proportionality review is not applicable to monetary policy decisions and highlight the pitfalls of the FCC’s approach. Second, I claim that the imposed procedural “duty to substantiate” is not suitable to promote the democratic accountability of the ECB. Third, I contend that, therefore, the PSPP ruling creates an impetus for strengthening the ECB’s supranational accountability. I suggest that improving the monetary dialogue with the EU Parliament and establishing a comprehensive transparency regime for the ECB could further this goal. Ultimately, I propose that a narrow reading of the PSPP ruling could reconcile the current conflict between the FCC and the ECB and still provide a sufficient level of judicial accountability for the ECB’s monetary policy-making.

QE in the euro area: Has the PSPP benefited peripheral bonds?

The Public Sector Purchase Programme of the euro area, PSPP, which started in 2015, constitutes an interesting special case of Quantitative Easing (QE) because it involved the purchase of peripheral euro area government bonds, which were clearly not riskless. Moreover, these purchases were undertaken by national central banks at their own risk. Intuition suggests, and a simple model confirms, that, ceteris paribus, large purchases by a central bank of the bonds of its own sovereign could increase the risk for the remaining private bond holders – if this purchase occurs within a monetary union where the national central banks have no autonomy left. Our empirical analysis suggests that risk premiums on peripheral bonds did not follow a random walk, contrary to what is assumed in event studies, implying that the announcement effects might not have been permanent. We find that the announcements of bond buying (and its implementation) did not change the stochastics of these premiums and had a smaller impact on CDS spreads which provide another measure of risk.

Sliding Down the Slippery Slope? Trends in the Rules and Country Allocations of the Eurosystem’s PSPP and PEPP

This study analyzes trends in the Eurosystem’s rules and country allocations of the Public Sector Purchase Program (PSPP) and the Pandemic Emergency Purchase Program (PEPP). The synopsis of purchase rules reveals how the ECB Council has loosened the initially strict constraints over time and various dimensions. For the year 2020, the analysis shows that the divergences of net purchases from the ECB capital key are substantive. The analysis of the PSPP stocks since 2015 illustrates that this increasing divergence from the capital key was on its way already before the pandemic. A final step of the analysis puts the PSPP/PEPP net purchases in proportion to current fiscal indicators. These results prove that, for several euro countries, the central bank net purchases fully match even the exceptionally high borrowing requirements of 2020. The study concludes with reflections on the challenges for a program exit after the end of the pandemic.

What Future for the Eurozone After Karlsruhe?

The paper analyzes the decision of the German Federal Constitutional Court rendered on 5 May2020 (2 BvR 859/15,2 BvR 980/16,2 BvR2006/15,2 BvR 1651/15), wereby the latter heavily criticized the democratic legitimacy of the Public Sector Purchase Program of the European Central Bank (aimed, by purchasing negotiable debt securities issued by governments, public agencies and international institutions located in the euro area, to support the economy of the Member States and to increase the eurozone's inflation rate up to 2%), de facto disapplying the judgment of the CGEU of 11 December 2018, by which that Program had been instead previously validated. The author places the decision in the context of the long-standing and conflicting relations, on the one hand, between Member States and European institutions and, on the other hand, between national constitutional courts and the Court of Justice of the European Union, outlining the possible repercussions of the decision on a legal, economic, political and institutional level and, ultimately, on the very survival of the eurozone.

The Law and Norms of the European Central Bank as Sovereign Lender of Last Resort: Crystallising Endogenous Authority

Authority of the European Central Bank (the Bank) over its operational norms in the eyes of market actors – Exogenous and endogenous authority and legitimacy – The reconciliation by the Bank and the Court of Justice of the EU (the Court) of the pre-existing norm and political-economic reality with Article 123 TFEU – Sovereign lender of last resort – Eurozone Crisis – Outright Monetary Transactions (OMT) – Public Sector Purchase Programme (PSPP) – Pandemic Emergency Purchase Programme (PEPP)

Spillover Effects of Sovereign Bond Purchases in the Euro Area

This paper investigates cross-border spillover effects from the Eurosystem’s Public Sector Purchase Programme (PSPP) on euro area government bond yields. We distinguish between the direct effects of domestic bond purchases by national central banks and the indirect effects from bond purchases by national central banks in other euro area countries over the period March 2015 - December 2018. The results reveal substantial spillover effects across the euro area, providing evidence for strong arbitrage within the euro area. These spillover effects are particularly large for long-term bonds and for bonds issued by non-core countries. The larger impact of spillovers in these cases can be explained by investors rebalancing towards higher yielding government bonds. In addition, purchases under PSPP had their largest impact on bond yields in 2015.

Cannons over the EU legal order: The decision of the BVerfG (5 May 2020) in the Weiss case

The Weiss affair, culminating in the BVerfG ruling of 5 May 2020 ( Weiss II), marks a break-up point in the long-standing dialogue between the BVerfG and the CJEU. The judges in Karlsruhe refused to follow the decision rendered by the CJEU in a preliminary ruling ( Weiss I) and ordered EU institutions to provide further clarifications on the proportionality assessment of the Public Sector Purchase Programme. This paper claims that the principles applied by the BVerfG in Weiss I are quite similar to those employed in the Gauweiler and Landeskreditbank-Banking Union cases. Considering that background, it will be argued that the construction of the principles employed by the BVerfG for the judicial review of EU acts did not undergo dramatic changes over time. The different outcome of Weiss II is due to the fact that, according to the BVerfG, insufficient elements of explanation and justification were provided by the ECB and the CJEU. Therefore, the central problem of Weiss II ends up being a procedural question of allegedly insufficient statements of reasons. From Gauweiler to Weiss II, one also sees the development of the standards for the judicial review of the ECB’s decisions, in the fields of both monetary policy and banking supervision.

Funding Behaviour of Debt Management Offices and the ECB's Public Sector Purchase Programme

This paper investigates whether the funding behaviour of euro area debt management offices (DMOs) changed with the start of the ECB’s Public Sector Purchase Programme (PSPP). Our results show that (i) lower yield levels and (ii) PSPP purchases supported higher maturities at issuance. The former indicates a behaviour of “locking in low rates for longer”, while the latter suggests the existence of an additional “demand effect” of the PSPP on DMO strategies beyond the PSPP’s effect via yields. The combined impact of the PSPP via these channels amounts to maturity extensions at issuance of about one year in our estimation, which compares to the average issuance maturity for Germany, France, Italy and Spain before the PSPP of four years. Our finding that DMOs extend maturities when funding conditions ease invites further work on the economic implications of public debt management during the PSPP and its relevance for monetary policy transmission. JEL Classification: E52, E58, E63, H63

Wohin steuern die Ultra-vires- und die Identitätskontrolle? Eine Zwischenbilanz anhand der Entscheidungen des Bundesverfassungsgerichts im PSPP-Verfahren

The article takes stock of the consequences which the decisions of the German Federal Constitutional Court (FCC) concerning the Public Sector Purchase Programme (PSPP) of the European Union (EU) have had on the relation between EU law and the German constitution. The interplay between the PSPP judgment of 5 May 2020 and a follow-up decision on its enforcement reveals a certain degree of back-paddling by the FCC. Irrespective of the infringement procedure, which the European Commission recently initiated against Germany, there are good chances for a respite for both the FCC and the Court of Justice of the EU. It is up to the FCC to use this period to clarify where it is headed with its jurisprudence on controlling the application of EU law in Germany.

Das PSPP-Urteil des Bundesverfassungsgerichts: Umfang der Übertragung von Souveränität und Überprüfung von Ermessensgebrauch

In its judgment of 5 May 2020, the German Federal Constitutional Court (FCC) has held that the Public Sector Purchase Programme (PSPP) of the European Central Bank (ECB), which started in 2015, and the relevant decision of the European Court of Justice (ECJ) of 11 December 2018, holding that the programme is compatible with European Union (EU) law, are ultra vires acts. Indeed, this decision is based on a French understanding of discretion which has previously been adopted in the European Treaties and according to which discretion is controlled only for undue, illegal influence. Today, the Treaties have adopted a review of discretion under the aspects of suitability, necessity, and appropriateness. Moreover, criticism at the decision of the FCC neglects that the accession to and the membership in the EU have to observe the thresholds of the respective national constitution, as its violation is not and may not be expected by the Union or any other Member State. Ultra vires acts of the Union, which remain uncorrected by the Union itself, are subject to disapproval and rejection by the constitutional court of any Member State.

Quantitative Easing, Safe Asset Scarcity and Bank Lending

The Eurosystem's Public Sector Purchase Programme (PSPP) increased the scarcity of safe assets, which caused significant declines and substantial dispersion in European repo rates. However, banks holding these safe assets benefited from this development: First, using the German security register, this paper shows that scarcity affects bank funding costs, as their collateral supply is determined by their ex ante securities holdings and repo rates. Second, it makes use of the German credit register to show that asset scarcity had real effects: Banks more exposed to asset scarcity increased their credit supply.