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MNI POLICY: ECB Will Ignore German Court Ruling - Schnabel

By Luke Heighton
     FRANKFURT (MNI) - The European Central Bank will continue to act in the
manner it sees fit, Executive Board member Isabel Schnabel said Monday, in
defiance of a ruling by Germany's Constitutional Court that has cast doubt over
the Bundesbank's participation in PSPP and PEPP.
     "The European Court of Justice has exclusive jurisdiction over the ECB and
its actions," Schnabel said. "It ruled in 2018 that the PSPP is legal."
Moreover, she added, "the primacy of EU law is key for the functioning of the
European Union."
     Here are the key points from the interview published in La Repubblica:
     - Despite last week's ruling in Karlsruhe the ECB Governing Council remains
"undeterred in our willingness and ability to act," Schnabel said. "We will
continue to conduct the PSPP and the pandemic emergency purchase programme
(PEPP), as well as our other monetary policy measures, in line with our mandate.
This message also seems to have been well-understood by market participants."
     - Schnabel admitted that "from an academic point of view, the distinction
between monetary policy and economic policy is difficult." But, she stressed,
"their objectives are clearly different. And I can assure you that the ECB is
always assessing very carefully that our measures are suitable, necessary and
     - Asked why the ECB has not committed explicitly to including junk bonds in
APP and PEPP, Schnabel said the Governing Council was "well aware" that rating
downgrades may pose a risk to their policy transmission, but that it had so far
"not yet discussed the impact of potential rating downgrades on our purchase
programmes." But, she reminded readers, under PEPP "we are already buying Greek
government bonds even though these bonds do not meet our usual minimum rating
     - Schnabel expressed concern that the economic effects of the Covid-19
pandemic might exacerbate pre-existing divergences in economic developments
within the euro zone, with some countries hit more strongly than others, and
considerable differences between countries' ability to offer a fiscal response.
"It would be harmful if those countries that are hit the hardest spend the least
to fight the crisis. Such an outcome has to be avoided."
     - She pointed to the "clear risk of a debt overhang in the aftermath of the
crisis - not just in the public sector, but also in the private sector. Most
public initiatives for the private sector primarily focus on loans or loan
guarantees. But this approach risks undermining investment incentives in the
     - "Germany and other Northern countries believe that debt mutualisation
would ultimately require shifting more decision-making powers to the European
level," Schnabel remarked. "If, in the medium-term and going beyond the current
crisis, one wants to move towards a system with more debt mutualisation, one may
also have to move towards a governance structure with more fiscal
decision-making power at the European level." 
     - Schnabel highlighted the primacy of the ECB's PEPP programme over OMT
(though it remains part of the ECB toolbox), and reiterated that "there is no
automatic link between a country asking for an ESM programme and the activation
of OMTs. The latter is a decision by the ECB's Governing Council. For now, we
have deliberately decided to implement a new purchase programme, the PEPP, that
is tailor-made for this particular type of emergency. This programme has an
ample degree of embedded flexibility, and it is the right tool to deal with the
current crisis."
--MNI Frankfurt Bureau; +49-69-720-146; email:
--MNI London Bureau; +44 203 865 3829; email:
[TOPICS: M$X$$$,M$$EC$]

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