ECB Policy Keeps Afloat Economically Unviable Companies and Creates Market Bubbles - German Court Rules

The Supreme Court in Germany this week ruled that the European Central Bank's monetary policy, called the PSPP (Public Sector Asset Purchase Program) led to "the keeping afloat of economically unviable companies" due to the effect it had on maintaining low interest rates. 

As the PSPP lowers general interest rates, it allows economically unviable companies to stay on the market since they gain access to cheap credit.

Since 2015, the ECB have been buying up large quantities of government bonds, including high risk ones, distorting the EU market and propping up unsustainable debt and spending in the process. Contrary to what you may have read on some media outlets, this ruling has nothing to do with the emergency stimulus program initiated in response to the coronavirus crisis which I would argue was justified.  The PSPP program has been going on for five years. 

This blog was the first to reveal the shaky financial situation of many wind farms in Ireland. The ECB bond buying program we now learn was required to keep companies like these, aswell as banks, afloat. 

ECB bond buying is the sticky plaster of the EU. And it promotes unsustainable economic practices in direct contradiction with the EU's pledges to sustainability. 

The German court said this about the effects of the ECB program on banks :

Moreover, the effects of the PSPP on the banking sector must be taken into account. The programme affects balance sheets in the commercial banking sector by transferring large quantities of government bonds, including high-risk ones, to the balance sheets of the Eurosystem, which significantly improves the economic situation of the relevant banks and increases their credit rating. At the same time, it creates an incentive for banks to increase lending despite the low level of interest rates

The German Court also warned about the effects of the program on real estate and stock market bubbles :

Relevant economic policy effects of the PSPP furthermore include the risk of creating real estate and stock market bubbles as well as the economic and social impact on virtually all citizens, who are at least indirectly affected inter alia as shareholders, tenants, real estate owners, savers or insurance policy holders. For instance, there is a considerable risk of losses for private savings. This has direct consequences for (private) pension schemes and the returns they generate [...]. Both factors lead to, in part excessive, portfolio shifts [...], while risk premiums are in decline.

Artificial low interest rates was one of the main factors that led to the catastrophic building boom in Ireland. The EU and the European central banks clearly have not learned from these mistakes as history is repeating itself once again :

Real estate prices are on the rise with trends of sometimes particularly sharp increases – especially regarding residential property in major cities – [...], which possibly already come close to creating a “market bubble”, as the oral hearing confirmed. It is not for the Federal Constitutional Court to decide in the current proceedings how such concerns are to be weighed exactly in the context of a monetary policy decision; rather, the point is that such effects, which are created or at least amplified by the PSPP, must not be completely ignored. 

It then warns about the risky juggling act that the ECB is trying to keep up :

In addition, the longer the programme continues and the more its total volume increases, the greater the risk that the ESCB becomes dependent on Member State politics as it can no longer simply terminate and undo the programme without jeopardising the stability of the monetary union. 

The legal conclusions from all this are set out below, namely that the ECB never considered any negative effects from their policy and therefore acted disproportionately and ultra vires :

(2) In view of the considerable economic policy effects resulting from the PSPP – not all of which are discussed here –, it would have been incumbent upon the ECB to weigh these effects and balance them, based on proportionality considerations, against the expected positive contributions to achieving the monetary policy objective the ECB itself has set. It is not ascertainable that any such balancing was conducted, neither when the programme was first launched nor at a any point during its implementation; it is therefore not possible to review whether it was still proportionate to tolerate the economic and social policy effects of the PSPP, problematic as they may be in respect of the order of competences, or, possibly, at what point they have become disproportionate.

Neither the ECB’s press releases nor other public statements by ECB officials hint at any such balancing having taken place. For this lack of balancing and lack of stating the reasons informing such balancing, the ECB decisions at issue violate Art. 5(1) second sentence and Art. 5(4) TEU and, in consequence, exceed the monetary policy mandate of the ECB deriving from Art. 127(1) first sentence TFEU. cc)

The violation of the principle of proportionality is structurally significant. In this regard, the considerations set out above in relation to the Judgment of the CJEU in Weiss apply accordingly (cf. para. 124 et seq.). Therefore, the ECB’s actions amount to an ultra vires act.