Officials at the European Central Bank fear they could be hemmed in by legal action as they look for ways to extend their quantitative easing programme to help fuel the eurozone’s fragile recovery.
€80bn-a-month bond buying plan is already the subject of a legal challenge and officials fear that its problems in court will increase if the ECB relaxes the conditions of the scheme — a move staff are considering.
Peter Gauweiler, a conservative German politician who has sued the ECB in the past, told the Financial Times that changes to QE would “increase the chances of success” of a case he and others are trying to bring against the asset purchase programme.
Committees of eurozone central bankers this month started work on ways to expand the pool of assets eligible for QE so as to overcome shortages of the safest government debt, such as German Bunds. Their task is particularly important if — as the markets expect — the ECB extends QE beyond the scheduled end date of March 2017.
Mr Gauweiler believes that QE “already violates rules on the prohibition of monetary financing [of eurozone governments] by the ECB” — even before any alteration of its conditions. He said that softening the rules could redistribute the risk of a member state default, “which is clearly incompatible with European law”.
Germany’s constitutional court, which Mr Gauweiler is hoping will hear the case, has not yet decided to do so.
But his suit — and the concerns it has raised within the ECB — highlight constraints that bind the ECB much more than other central banks with QE policies of their own.
In the case brought by Mr Gauweiler against an earlier ECB asset purchasing scheme, both the German court and the European Court of Justice, the EU’s highest tribunal, found the EU had acted within its mandate.
Limit on the proportion of a state’s debt the ECB can buy
But the German court held that the ECB’s bond purchases had to meet certain conditions — such as limits on purchases, to shield the ECB from losses — some of which might be breached should the central bank radically reshape the QE programme.
As a result, while the Bank of Japan and the Bank of England can potentially buy the entirety of their government’s debt markets, officials at the ECB believe they will not be able to buy more than 50 per cent of any country’s debt — largely because of legal constraints. At the moment the ECB’s so-called issuer limit is 33 per cent.
If the ECB owned more than half a member state’s bonds, it could have to decide whether or not to accept a default by that country.
Hans-Olaf Henkel, a member of the European Parliament for Germany’s conservative Alfa party who is also pursuing legal action against the ECB, said raising the issuer limit “would be nothing but a sign of desperation”.
If the ECB would blatantly and openly finance states such as Italy, it would provide us with additional ammunition in our court case
– Hans-Olaf Henkel
The ECB is facing political as well as legal constraints in Germany. Jens Weidmann, president of the Bundesbank, has defended the legality of QE but has made clear his strong objections to relaxing the rule that asset purchases should broadly reflect the respective size of eurozone countries’ economies.
Altering the rule — known as the capital key — would relieve banks of the need to buy as many German Bunds as at present and allow them to purchase more bonds from heavily indebted states, such as Italy.
Mr Henkel said: “If the ECB would blatantly and openly finance states such as Italy, it would provide us with additional ammunition in our court case . . . This the Court cannot ignore.”