MNI INTERVIEW: German Wise Man Says Court May Aim At ECB Again

--German Council Of Economic Experts Chairman Sees "Pragmatic" Way Round Court

Ruling

--But Constitutional Court Could Issue Further Rulings Against ECB

--Second Part Of Interview With Lars Feld

By Luke Heighton

     FRANKFURT(MNI) - The European Central Bank could find a "pragmatic"

solution to the to the challenge posed by the German Constitutional Court's

ruling calling for it to justify its government debt buying, but the judges have

fired a shot at the European Union's legal foundations and could take aim even

more damagingly at other ECB programmes, the chairman of the German Council of

Economic Experts told MNI.

     Lars Feld, who appeared before the judicial panel in Karlsruhe during its

deliberations, said the ECB, which has responded to the ruling by stating that

it is answerable to the European Court of Justice, could draft a document

demonstrating that the scale of its purchases is proportionate but have it

delivered to the German judges via the Bundesbank. This would allow it to avoid

any public concession that it was doing the court's bidding, while averting the

danger that the judges would order the Bundesbank to pull out of the public

sector purchasing programme.

     But the German court's ruling is effectively an attack on the ECB's mandate

to maintain price stability, as well as a challenge to the primacy of the ECJ

which may lend encouragement to other jurisdictions to undermine the European

Union as legal entity, Feld said in a video interview on May 12.

     --PANDORA'S BOX

     "There is a clear hierarchy saying that price stability is most important,

and the support of the economic policies of member states comes second. What the

GCC has done is to open the Pandora's box of giving all these other policy goals

much more emphasis in monetary policy decision-making," Feld said. "At least

there is a danger that we will end up there. It's important that this does not

happen; that the ECB sticks to its mandate as laid down in the Treaty."

     While Feld saw little probability that the Bundesbank would actually be

forced to stop bond buying, there is a risk that the German Constitutional Court

could issue a second ruling casting doubt over the legality of the ECB's much

larger Pandemic Emergency Purchasing Programme, which lacks restrictions on bond

buying applied for the PSPP.

     "Then it will be much more difficult to avoid a crisis in the European

Monetary Union," Feld said.

     --EXPAND PEPP?

     In the meantime, in the unlikely event the Bundesbank were to be forced out

of PSPP, "the ECB could also say well, in that case we'll stop the PSPP

programme and expand PEPP, then wait until the next ruling comes up."

     Following Feld's dealings with the judges, he had expected them to impose

"some boundaries on the monetary policy of the ECB, such that it cannot do

whatever it wants or 'whatever it takes," but "did not expect the court to be so

heavily criticising the European Court of Justice as it did."

     Feld characterised the efforts of the ECB to offset the economic effects of

the Covid-19 pandemic on Europe's economy as "well taken" and "sufficient" for

the time being. "We have to wait and see what the economic effects of the corona

pandemic look like when the situation is normalised - in the sense that the

lockdowns are finished and we're slowly getting back to normal activity. Then,

perhaps, the ECB needs to do more."

     But he expressed concern that Italy may not be able to be able to reduce

the substantial increase in its debt-to-GDP ratio caused by the crisis "by

normal consolidation measures and additionally to boost economic growth.

     "Productivity growth in Italy ever since it entered monetary union has been

very low, even negative" Feld said, "and it was so even before the financial

crisis. I can't see at the moment how Italy can change that now without the will

to endeavour bold reforms."

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

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