Stacy Kim
J.D. Candidate, Columbia Law School, 2017
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”[1] —Mario Draghi, President of the European Central Bank
Quantitative Easing (QE) is one method that central banks may use to simulate the economy, especially when other monetary policies have been ineffective. A central bank can “create” new money by buying up bonds and other securities on the market. This increases the prices of government bonds, effectively decreasing their effective yield and lowering interest rates. Lower interest rates, combined with a larger money supply, lead to “cheaper” borrowing, which theoretically leads to greater spending, higher consumer demand, and higher prices.
On March 9, 2015, the European Central Bank (ECB) embarked on an expanded program of QE, the “Public Sector Purchase Programme” (PSPP), which is expected to last until at least September 2016. QE has been used by other countries, most notably by the United States from 2009–2014, Japan since 2012, and the United Kingdom from 2009–2012. Why has the EU been so late to the game? One reason is continued (and perhaps justified) skepticism from Germany.
A complaint involving German ratification of several EU regulations, including the European Stability Mechanism (ESM),[2] was brought to the German Federal Constitutional Court (BVerfG) in 2012. The BVerfG dismissed the claim because the ESM was not likely to violate German law. The ESM was ratified on September 27, 2012 by 17 Member States (MS) of the Eurozone.
The initial program of QE, “Outright Monetary Transactions” (OMT), was announced by the ECB on September 6, 2012 in part to avoid a breakup of the Euro. The question of whether the ECB’s OMT program was an ultra vires act beyond the limits established by the German approval of the ESM was brought to the BVerfG. This was important because the BVerfG had previously held that it could decide on the constitutionality of such ultra vires acts of both German authorities and EU institutions.
“[The court’s] hostility to OMT casts a pall over quantitative easing. The judges made much of the distinction between monetary policy carried out by ECB technocrats and economic policy that needed greater political legitimacy. The court said buying the bonds of some countries to lower borrowing costs discriminates against others, impairs the market mechanism, increases the risk of losses for the ECB and violates the prohibition on monetary financing of states.[3]”
On February 7, 2014, the BVerfG referred the question of conformity of the OMT decision with primary EU law to the Court of Justice of the EU (CJEU). In its referral to the CJEU, the BVerfG opined that OMT went beyond the ECB’s scope of power and could breach EU law. On January 14, 2015, an Advocates General Opinion stated that the ECB’s OMT program was compatible with the Treaty on the Functioning of the European Union (TFEU):
“The Outright Monetary Transactions (OMT) programme of the European Central Bank, announced on 6 September 2012, is compatible with Article 119 TFEU and Article 127(1) and (2) TFEU, provided that, in the event of that programme being implemented, the ECB . . . refrains from any direct involvement in the financial assistance programmes to which the OMT programme is linked, and . . . complies strictly with the obligation to state reasons and with the requirements deriving from the principle of proportionality. . . . The OMT programme is compatible with Article 123(1) TFEU, provided that, in the event of the programme being implemented, the timing of its implementation is such as to permit the actual formation of a market price in respect of the government bonds.[4]”
The CJEU made its final decision on June 16, 2015, holding that:
“Articles 119 TFEU, 123(1) TFEU and 127(1) and (2) TFEU and Articles 17 to 24 of Protocol (No 4) on the Statute of the European System of Central Banks and of the European Central Bank must be interpreted as permitting the European System of Central Banks (ESCB) to adopt a programme for the purchase of government bonds on secondary markets, such as the programme announced in the press release to which reference is made in the minutes of the 340th meeting of the Governing Council of the European Central Bank (ECB) on 5 and 6 September 2012.[5]”
The initial announcement of the ECB’s QE program made a difference in the bond markets. “Bonds have surged in anticipation of the ECB’s arrival in the market. Benchmark 10-year government bonds in Germany now yield just 0.3%—that’s nearly 2% less than the equivalent U.S. Treasury. Yields on five-year German bonds have even dipped into negative territory. That eases the budget pressure on governments across Europe.[6]”
However, corporate investments remain low and growth projections were recently revised downwards. “While the ECB’s asset-buying programme appears to have thawed the eurozone’s credit markets, growth remains lacklustre and inflation has fallen back into negative territory.[7]” To combat this, the ECB has not only hinted at more QE, but they have also reneged on an earlier promise to not cut the deposit rate.
Whether or not QE will get the EU on a stable path to recovery has yet to be seen, but one thing is certain: the markets have been responding to the ECB. Perhaps Germany’s skepticism has been misplaced all along.
[1] Mario Draghi, President, Eur. Cent. Bank, Remarks at the Global Investment Conference in London (July, 26, 2012) (transcript available at https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html).
[2] “The ESM issues debt instruments in order to finance loans and other forms of financial assistance to euro area Member States.” European Stability Mechanism, About the ESM, http://www.esm.europa.eu/.
[3] Charlemagne, The Laws of Euro-nomics: German Legalism Is Hampering Rational Crisis-Management, The Economist (Apr. 12, 2014), http://www.economist.com/news/europe/21600723-german-legalism-hampering-rational-crisis-management-laws-euro-nomics.
[4] Opinion of Advocate General Villalón, Gauweiler v. Deutscher Bundestag, Case C-62/14, ¶ 263.
[5] Gauweiler v. Deutscher Bundestag, Case C-62/14, ¶ 128.
[6] Mark Thompson, Europe Finally Starts Pumping Markets With Cash, CNN (Mar. 9, 2015), http://money.cnn.com/2015/03/09/news/economy/europe-stimulus-qe-three-things/.
[7] Claire Jones & Elaine Moore, Draghi Signals ECB Ready to Extend QE, Fin. Times (Oct. 22, 2015), http://www.ft.com/intl/cms/s/0/d62fcda0-78a9-11e5-a95a-27d368e1ddf7.html#axzz3pVN3YmbX.