MNI INTERVIEW: ECB Inflation Wording May Prompt PEPP Challenge

--ECB's Linkage Of PEPP To Inflation May Prompt Legal Challenge, Constitutional

Expert Says

By Luke Heighton

     FRANKFURT(MNI) - The European Central Bank's decision to link its EUR1.35

trillion pandemic emergency purchasing programme to its inflation target

following a German court ruling on another bond-buying scheme could make the

PEPP itself vulnerable to legal challenges, a prominent expert in European Union

constitutional law told MNI.

     The ECB, which had originally described the PEPP as necessary to maintain

monetary transmission within the eurozone as Covid-19 caused massive disruption,

added a reference to its role in reaching the inflation target at its June

meeting, after Germany's Constitutional Court in May questioned whether the

central bank's smaller public sector purchasing programme was proportionate to

its mandate.

     But linking the PEPP to inflation might form the basis of future court

cases, said Marijn van der Sluis, Assistant Professor of Constitutional Law at

Maastricht University, noting in an interview that the PEPP, unlike the PSPP, is

not bound by the so-called "capital key" keeping the proportions bought of

individual countries' bonds in line with the relative size of their economies.

     "OMT is about securing the monetary policy transmission mechanism," he

said, referring to another bond-buying programme, "PSPP is about inflation. It's

not really clear exactly what PEPP is doing. If it's the former, then it's fine

to target individual countries. If it's purely about raising inflation then the

question is why do you need this flexibility from the capital key? The ECB needs

to explain where exactly PEPP fits within that narrative. Very few practitioners

would see it as being purely about one or the other, but there is a legal issue

to be resolved for PEPP and how the ECB is going to defend it."

     --PEPP MAY BE TARGET

     While the immediate question over the Bundesbank's continuing participation

in the ECB's public sector purchase programme has been "more-or-less resolved"

following the doubts raised by the constitutional court, the case's original

claimants are likely to be "ramping up for a second round" with PEPP as the

likely target, he said.

     A key, as yet unanswered, question for the ECB will be the self-imposed

issuer limits which help insulate it against accusations of monetary financing,

van der Sluis said.

     "In my view, are we close to monetary financing? That really depends on

what you want from the Treaty. The drafters of the Treaty clearly had something

that they wanted to prevent, but in putting it in law they left it so vague that

it's really up to the institutions involved, the courts and the central banks,

to sort it out."

     The European Court of Justice has taken the view that there is no danger of

monetary financing so long as member states and investors cannot be certain that

particular governments' bonds are going to be bought, he said, adding that the

German Constitutional Court might take a different approach.

     --ISSUER LIMITS

     "The question is how strict is the GCC going to be on issuer limits? One of

the things that seemed to be included in the GCC's view is that the central

banks do not become a predominant bond holder for member states. My guess is

that they're worried about a changing dynamic between central banks and the

sovereigns, but they were not very clear about what exactly they want. It's an

issue to be closely watched."

     But Van der Sluis said it was "not clear" whether proof of the

proportionality of a European institution's decisions - of the kind demanded by

the German Constitutional Court in its May 5 ruling - is even legally required

under EU law. The issue was made less certain by the fact that the GCC did not

give any indication of the relative weight that should attribute to monetary

policy and economic policy effects, he added,

     The ruling also "begs more political involvement in central banking," van

der Sluis said, "but I don't see ECB independence as being under threat as a

result of this judgement. Independence is a legal construct that extends as far

as the mandate, and the ECB has independence to pursue its mandate."

     In a separate interview with MNI earlier this week, a former ECB legal

counsel, Sebastian Grund, said he thought the central bank might be forced to be

more accountable to national parliaments.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

[TOPICS: M$E$$$,M$G$$$,M$X$$$,MT$$$$,MX$$$$,M$$EC$]