European Central Bank policy makers, fending off a German court challenge to their money-printing scheme, insist that bond buys help prop up the economy and their benefits outweigh the side effects, minutes of their June 4 meeting showed on Thursday.
Germany’s Constitutional Court ruled last month that the ECB overstepped its mandate with more than €2-trillion ($3.1-trillion) of government bond purchases. The court ordered the Bundesbank to quit the scheme unless the ECB can prove it is needed within three months.
In an indirect response to the ruling, ECB rate-setters said at their latest meeting that a volume of evidence had been amassed to prove that bond buys are a necessity at the moment, crediting them with keeping borrowing costs down while the European Union recovered from its recent debt crisis.
“There was broad agreement among members that while different weights might be attached to the benefits and side effects of asset purchases, the negative side effects had so far been clearly outweighed by the positive effects of asset purchases on the economy in the pursuit of price stability,” the ECB said in its minutes of the meeting seen by Reuters.
The ECB agreed on Wednesday to give documents to German authorities to prove the proportionality of its bond purchases but the ECB will not directly engage in the process, leaving the Bundesbank to spearhead the process.
In parallel, the ECB has been drawing up contingency plans to carry out its multitrillion euro bond-buying program without the Bundesbank and launch an unprecedented legal action against the German central bank.
Still, ECB policy makers acknowledged the risks and side effects of low rates, including the drain on savings and drag on bank earnings. They also said that high government debt could put pressure on the ECB to keep rates low since higher borrowing costs could quickly raise debt sustainability concerns.
But these risks could be mitigated by self-imposed limits on the bond purchases, such as national quotas determined by how much capital each country paid into ECB coffers, the rate-setters argued at their June 4 meeting.
“Using the ECB’s capital key as the benchmark was one of the safeguards helping to maintain incentives for sound fiscal policies,” the ECB said in its minutes.
Facing the biggest European economic contraction in generations, policy makers at the June 4 meeting extended emergency bond purchases until mid-2021 and increased them by €600-billion to €1.35-trillion to help member state governments finance their crisis response.
While there was broad agreement on the package, the minutes showed some disagreement over both the timing and the size of the increase.
Reuters reported after the meeting that policy makers had debated increases of between €500-billion and €750-billion.
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