The operation for the mass buyback of mainly public securities (‘public sector asset purchase programme’ or ‘quantitative easing’) of the European Central Bank (ECB) does not constitute monetary financing of the member states as prohibited by the treaties (article 123 TFEU), Advocate General Melchior Wathelet stated in conclusions on Thursday 4 October (case C-493/17).
Several groups of individuals brought various claims before the German constitutional court concerning the launch in March 2015 (see EUROPE 11236) of quantitative easing to tackle the risk of deflation in the Eurozone, as the ECB rates were already as low as possible (see EUROPE 11552). They argue that the ECB breached the prohibition on the monetary financing of the member states, is encouraging the member states to renounce a healthy budgetary policy and has harmed Germany’s constitutional identity.
In his conclusions, the Advocate General disagrees. He finds that quantitative easing does not give the intervention of the European System of Central Banks (ESCB) an effect equivalent to that of a direct purchase of government bonds from issuing public bodies.
Referring to the judgment finding the previous ‘Outright Monetary Transactions’ (OMT) programme compatible with EU law (see EUROPE 11336), Wathelet stresses that the validity of the ‘quantitative easing’ operation depends on the guarantees surrounding it, helping to prevent the conditions of issue of government bonds from being distorted by the certainty that those bonds will be purchased by the ESCB.
These guarantees are as follows: - the governing council of the ECB decides upon the scale, start date, continuation and suspension of interventions on the secondary market; - the ‘quantitative easing’ is subsidiary to three other private bond purchase programmes; - unlike the OMT programme, ‘quantitative easing’ provides for bonds to be acquired in a fixed and representative manner depending on the distribution key of the ECB’s capital; - holding bonds is limited to 33% of a single issuance and the ESCB is prohibited from owning more than 33% of stocks of bonds from a single issuer over the duration of the operation; - there is a minimum period between the issuance of a bond on the primary market and its repurchase on the secondary markets.
As regards the alleged negative effects of ‘quantitative easing’ on national budgetary policy, the Advocate General observed that this effect is limited by the ESCB's ability to resell the bonds acquired at any time. If member states stop pursuing a healthy budgetary policy, they could lose their credit rating, which they need for their government bonds to be covered by the monetary operation. Additionally, as the distribution key of purchases is not selective, ‘quantitative easing’ cannot be circumnavigated specifically to assist countries in difficulties. Finally, for 80% of acquisitions, risk-sharing is limited to 20% of purchases of public securities.
Wathelet further notes that only Spain is still under an excessive deficit procedure, whereas 24 countries were in that situation in 2011.
The Advocate General also considers that ‘quantitative easing’ does not exceed the ECB’s mandate with regard to its volume, duration and consequences. He finds that the ECB committed no manifest error of assessment in either determining the aim of the programme or in selecting the instruments to be implemented.
With regard to the treaties, notwithstanding the price stability objective, the ESCB supports general economic policy in the EU, Wathelet notes. Furthermore, as monetary policy permanently acts on interest rates and banks’ financing conditions, it unavoidably has consequences for the financing conditions of states’ government deficits.
Finally, the guarantees associated with ‘quantitative easing’ – its subsidiary nature compared to other security repurchase programmes, the objective distribution key and risk-sharing limited to 20% of purchases – help to ensure that the ECB is not pursuing an economic policy objective through the operation. (Original version in French by Mathieu Bion)