(CN) – A bond-purchasing program that the European Central Bank adopted in 2015 to reduce inflation rates survived a constitutional challenge Monday before the EU’s highest court.
Leading up to the program’s creation, the economic crisis had increased the risk of a medium-term decline in prices. Officials at the European Central Bank took the position that promoting large-scale purchases of government bonds would reduce interest rates to below 2 percent and encourage commercial banks to provide more credit, thus boosting economic activity.
Short for public sector asset purchase program, the PSPP requires the central banks of EU member states to buy eligible securities from local issuers, but 10 percent of the book value goes to the European Central Bank.
The national central banks keep 90 percent of the book value, meanwhile, and the program’s volume was worth more than 1.5 billion euros last year. Though initially meant to last only a year, the PSPP has been renewed several times, ultimately inviting a challenge in Germany.
Led by individuals, the challengers argued that then PSPP infringes the prohibition of monetary financing, among other issues.
Germany’s Federal Constitutional Court referred the case to Luxembourg last year for input from the European Court of Justice. On Tuesday, that body’s grand chamber determined that the PSPP does not exceed the mandate of the European Central Bank’s governing council.
“In order to exert an influence on inflation rates, the ESCB necessarily has to adopt measures that have certain effects on the real economy, which might also be sought –– to different ends –– in the context of economic policy,” the ruling states, using an abbreviation for the European System of Central Banks. “In particular, when the maintenance of price stability requires the ESCB to seek to raise inflation, the measures that it must adopt to ease monetary and financial conditions in the euro area for that purpose may entail an impact on the interest rates of government bonds because, inter alia, those interest rates play a decisive role in the setting of the interest rates applicable to the various economic actors.
“That being so, if the ESCB were precluded altogether from adopting such measures when their effects are foreseeable and knowingly accepted, that would, in practice, prevent it from using the means made available to it by the treaties for the purpose of achieving monetary policy objectives and might –– in particular in the context of an economic crisis entailing a risk of deflation –– represent an insurmountable obstacle to its accomplishing the task assigned to it by primary law.”
Endorsing the PSPP, the court found that it does not exceed the European Central Bank’s objective, nor is it beyond what is necessary to raise inflation rates.
“Finally … it is not apparent that a government-bonds purchase program of either more limited volume or shorter duration would have been able to bring about –– as effectively and rapidly as the PSPP –– changes in inflation comparable to those sought by the ESCB, for the purpose of achieving the primary objective of monetary policy laid down by the authors of the treaties,” the ruling states.
As for whether the PSPP would lead member states to abandon a sound budgetary policy, the court noted that such conduct “would run the risk (i) of the bonds that it issues being excluded from the PSPP because they have been downgraded or (ii) of the ESCB selling the bonds of that Member State which it had previously purchased.”