“Without Tight Limits for the Asset Purchase Programme, the ECB Will Become a Pawn of Fiscal Policy”

Today, the case of the Public Sector Purchase Programme (PSPP) of the European Central Bank (ECB) is being brought before the European Court of Justice. The asset purchase programme of the ECB is primarily being accused of violating the ban on monetary financing. In a ZEW expert brief, Professor Friedrich Heinemann, head of the Research Department “Corporate Taxation and Public Finance” at the Centre for European Economic Research (ZEW) in Mannheim, has commented on this issue.

He concludes as follows:  “The European Court of Justice will not be able to stop the asset purchase programme that is expected to run until the end of this year. What is much more important is the question of whether the programme should be revised to include tight limits for the next crisis. There is, in fact, increasing evidence that the programme is edging closer towards engaging in the kind of monetary financing banned under European law. The ECB’s argument of defence, according to which it does not buy bonds on the primary market but only after a lock-up period not known to other market participants, is becoming less and less convincing. Given the scope of the programme, investors are by now able to reliably determine the ECB’s lock-up period.

What is more, the ECB is moving ever closer to the 33 per cent issuer share limit on Eurosystem holdings with an increasing number of bonds. If the ECB were to raise this limit in a future extension of the programme, it would inevitably become a strategic investor. With an issuer share of more than 33 per cent, the ECB would have a blocking minority among bond holders, allowing the ECB to block decisions in debt restructuring negotiations. Finally, the fact that the ECB has long since ceased to be able to meet its own objective of allocating purchases according to the ECB’s capital key speaks in favour of the preferential treatment of highly indebted euro countries. Since bonds issued by low-debt countries have become scarce, the ECB has had to buy an increasing amount of bonds of debt-ridden countries like Italy, Spain and France.

Italian government officials provided further evidence in June that the programme plays an important role in state financing – they had criticised the ECB because Italy’s share of purchases had briefly fallen in May. The European Court of Justice would therefore clearly be well-advised to set tight limits on the bond purchase programme for the future so as to prevent the ECB from becoming a pawn of fiscal policy.”

For more information please contact:

Prof. Dr. Friedrich Heinemann, Phone +49 (0)621/1235-149, E-mail friedrich.heinemann@zew.de