BERLIN (Reuters) - The ECB may well cut a deal to escape a landmark German court verdict with its powers broadly intact, a plaintiff in the case said, while not ruling out a second legal challenge against the bank’s coronavirus-linked stimulus scheme.
In Tuesday’s ruling, Germany’s highest court gave the European Central Bank three months to justify bond purchases under the flagship stimulus programme it introduced in 2015 or lose the Bundesbank as a participant, raising questions about the programme and the euro’s future.
The Constitutional Court judges left leeway for the Bundesbank to stay on board if the ECB could show the scheme was necessary, despite “negative effects” such as risking taxpayers’ money and making governments reliant on central bank funding.
The judges at the Karlsruhe court also called on the German parliament and government to challenge the ECB on that issue.
Markus Kerber, a public finance professor and co-plaintiff behind Tuesday’s ruling, told Reuters on Wednesday that he saw two possible outcomes to those discussions.
The first he termed “the ‘muddle through’ solution typical of (Chancellor Angela) Merkel’s policy”, under which the ECB would provide additional justifications for the scheme.
“And the Bundestag (parliament) and the government say ‘okay, fine’, and (Bundesbank President Jens) Weidmann says ‘okay, well we’re very happy with that.’ He will (also) take our doubts into more consideration.”
But in a sign that ECB policymakers are in no mood to comprise, they reaffirmed their commitment on Tuesday “to doing everything necessary” to boost inflation in the euro zone and “reach all jurisdictions”.
Merkel told her conservative parliamentary bloc on Tuesday the court ruling must be looked at closely as it addressed the ECB’s scope to act, participants at their meeting said. She avoided making her own assessment of the ruling.
“The second solution is if you don’t come up with a muddle solution which makes everybody happy ... then the Bundesbank moves out (of the bond-buying programme),” Kerber said.
That would mean the biggest participant in the Eurosystem of euro zone central banks dropping out of the flagship programme - a major blow to the single currency project.
“If (financial markets) are no longer sure that the 26% owner of the ECB will continue to contribute, well then the markets know that Cyprus will not fill the gap,” Kerber said.
The Karlsruhe court said its ruling did not apply to the Pandemic Emergency Purchase Programme (PEPP) that the ECB introduced in March to combat economic fallout from the pandemic.
Asked if he would consider legal action specifically against that programme, Kerber said: “Considering from an academic point of view, yes.
“But considering from a practical point of view, I am not authorised to say anything because that requires a group of plaintiffs (complainants).”
“I think for the time being we should see whether this is really the beginning of the end of the Eurosystem,” he added.
He favoured a plan to unwind the system and dismantle the euro zone, “to restart the experiment with a drastically reduced number of participants who share common beliefs in monetary policy, which is not the case (now),” he added.
Writing by Paul Carrel; editing by John Stonestreet