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MNI (London)
--Answer Will Be Found To Court Outcome Or Risk Bundesbank 'Torn Apart': Papadia
By Les Commons
     LONDON (MNI) - The European Central Bank is unlikely to hold back on
further easing measures if needed in the wake of the recent German
constitutional court ruling and there are no technical limits to how far the
central bank can push its balance sheet to achieve its aims, a senior former
central bank official told MNI in an exclusive interview.
     The German government and the Bundesbank will find a way to avoid the court
ruling having any "practical implications" as failure to do so "could tear the
Bundesbank apart" as it would be faced with two competing obligations: "comply
with the German court ruling or with the EU treaties, which oblige it to do what
the ECB's Governing Council decides," said Francesco Papadia, former director
general of the ECB's markets operations department.
     In early May, the court ruled the ECB would have to prove the
'proportionality' of it's Public Sector Purchase Program, which raised questions
over the future viability of the bank's pandemic rescue measures.
     In practical terms, whatever activities the Bundesbank is conducting on
behalf of the Eurosystem could be executed by other members and substituting for
the Bundesbank "is not an issue," Papadia said. However, he noted that the
institutional risk is serious as non-action by the German central bank would be
a "kind of mutiny from a very important Eurosystem NCB."
     Papadia sees last week's EUR600 billion increase in the envelope of the
Pandemic Emergency Purchase Program to EUR1.35 trillion sending an important
message, reflecting President Christine Lagarde's initial reaction to the court
ruling that the ECB would be "undeterred" to act when needed.
     It shows the ECB is "not frightened" to reinforce PEPP if it judges it
necessary, he said, noting that it also showed it was prepared to act even as
the European Commission and several capitals outlined fresh fiscal stimulus.
     --NO LIMITS
     Papadia didn't see any technical limits to how far the ECB could push its
balance sheet to achieve its goals, seeing only the Governing Council's
agreement as a barrier.
     "On the policy side, Lagarde gave the impression that the decision to
increase PEPP was based at least on consensus, so it was not a difficult
decision, hinting to the fact that there should not be insurmountable
difficulties in doing more, if needed," he said, noting her emphasis on
returning to "inflation-control" language offered more room for expansion if
inflation stayed lower for longer.
     Papadia seemed to be fairly relaxed with current policy execution, seeing
little need for either a twist operation out of shorter-dated core bonds into
longer maturities. Nor is he too keen on a yield curve control approach, trying
to limit medium and long-dated yields rising, although he is a little more open
to this option.
     On future policy options, Papadia expressed scepticism as to whether the
ECB could buy stocks, even though the central bank has no legal limitations
preventing it and Japan's actions over many years has created a template.
     "I think it is more likely today for the ECB to buy bank loans rather than
stocks. But if it did come to buying stocks, it would do it like the Bank of
Japan: not single equities but a package of equities in the form of Exchange
Traded Funds," he said
--MNI London Bureau; tel: +44 203-586-2225; email:
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MNI London Bureau | +44 203-865-3812 |