MNI INTERVIEW: Ruling May Force National Accountability On ECB

--German Court Ruling May Open The Door To More National Accountability

--ECB May Have To Be More Open To National Parliaments, Former ECB Legal Expert

Says

By Luke Heighton

     FRANKFURT(MNI) - The European Central Bank could in future be more

accountable to national parliaments in the wake of the German Constitutional

Court ruling on its public sector purchase programme, a former ECB legal counsel

and economist told MNI.

     The trend towards the increased involvement of the German Bundestag and the

Federal Finance Ministry in monetary policy matters began when the

Constitutional Court ruled on the ECB's Outright Monetary Transactions in 2016,

Sebastian Grund said, "and that's where I see this heading; to change the

accountability framework that you have for monetary policy."

     Grund cited current ECB banking supervision practices - with national

parliaments receiving annual reports and enjoying the power to invite the Single

Supervisory Mechanism chair to face questions by members of national parliaments

- as one possible future mode of governance.

     "I think that we are going to see some strong pressure on the monetary

policy side to include the national parliaments," Grund, who worked at the ECB

from 2015-2019, said. "It's not great for the European Parliament, because it

takes away their special position in the monetary policy accountability

framework, but I think it's unavoidable."

     The ECB "would like to have a very deep dialogue" with the European

Parliament, Grund said, but he noted that national legislators "have their own

concerns that do not always align with the ECB's European mandate."

     --EXTENT OF DISCLOSURE

     An additional consideration, he said, was the question of what documents

ECB officials should provide to national bodies to enable them to "defend

themselves fully without disclosing all sorts of internal discussions."

     Despite President Christine Lagarde and the Executive Board being much more

open to transparency discussions than the "old guard", Grund said, "there will

always be a camp [within the ECB] that doesn't want to worry about complete

transparency, who fear reputational damage, or being dragged into a public

debate they can't might not be able to control."

     Grund said it was still not clear whether, having successfully defended the

ECB's PSPP operations against the threat of disqualification posed by the German

court's May 5 ruling, the Bundesbank might try and "leverage" the judgment in

any way, though he noted that Buba President Jens Weidmann "has been saying for

years that you cannot just brush aside the Treaties and the German

constitutional order."

     The German court has created an "almost unique avenue for people who are

dissatisfied with ECB policy," with few equivalents in other member states as

another cause for concern, he said, warning that the court's concern over the

'proportionality' of monetary policy, in conjunction with the long-standing

prohibition of monetary financing, could offer fertile ground for future

challenges.

     --INTERNAL DOUBTS

     The court's ruling came as some of the ECB's own staff already harboured

doubts about credit risk taken on by the central bank, he said.

     "I know that internally there are already some people who say that's tricky

[to reconcile] with the prohibition of monetary financing because there are

certain government functions that the ECB cannot touch, legally. If you expand

this, then what about TLTRO? Is TLTRO proportionate? Some would say it is, but

others would say that's a lot of money that you're throwing at the banks. If you

follow the GCC's reasoning, it's not clear they would throw out every single

claim against TLTRO."

     More immediately worrisome, Grund said, is PEPP's lack of a clearly-defined

legal status, sitting as it does somewhere between the constraints imposed on

the PSPP by issuer limits and the capital key, and OMT, which "always came with

the condition of some kind of fiscal limit imposed by the European Stability

Mechanism."

     The ECB might have to work more in collaboration with the ESM, he

explained, given European Court of Justice Case law. "The way I understand it,

and the way the current Article 123 works, is that if you include the ESM you

can do a lot, because you can ensure that this monetary-fiscal coordination is

legally sound. But if you just do it on the central bank side, and you don't

have this kind of backstop, then you could run into trouble at some point.

     "The question becomes how can the ECB justify doing more and more, going

further and further away from the capital key and issuer limits, giving the

Executive Board the power to implement the programme over the Governing Council.

This is something that I'm sure Weidmann is concerned with, because PSPP gives

such large discretion to the Executive Board in the design and implementation of

the PEPP purchases."

     Amending the definition of what constitutes monetary financing would be

easier than altering outdated Treaties to account for permanently changed

macroeconomic condition, he argued - a necessary move given that "what is being

done now is coming so close to what people wanted to avoid in Maastricht, while

reflecting what the ECJ has said."

     Grund expressed concern that the end of the Covid-19 pandemic could result

in a "backlash" against the ECB's more expansionist tendencies, having seen the

"first signs from the GCC that there will be people who say no, you cannot use

monetary policy to address all these other issues, such as distributive

questions."

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

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