Lagarde says ECB ‘undeterred’ by German QE ruling

The European Central Bank is “undeterred” by a German Constitutional Court ruling critical of its government bond-buying programme and will do “whatever is necessary” to support the eurozone economy through the coronavirus crisis, president Christine Lagarde said Thursday.

“We are an independent institution accountable to the European Parliament, driven by our mandate” to maintain price stability, Lagarde told a Bloomberg News panel discussion.

“We will continue doing whatever is needed, whatever is necessary… undeterred,” Lagarde added.

But in a nod to the concerns raised by the German judges, the former French finance minister, IMF chief and corporate lawyer highlighted that “proportionality” was also a factor in the ECB’s decision making.

ECB “tools, the calibration the proportionality, the assessment, measurements, the evaluation is all going to be a factor of what the circumstances dictate,” Lagarde said.

On Tuesday, German judges in Karlsruhe demanded that the central bank’s governing council “adopts a new decision” demonstrating that its “quantitative easing” (QE) purchases of government bonds are “not disproportionate” to its price stability goal.

Unless an explanation is forthcoming within three months, they will ban the country’s powerful Bundesbank central bank from participating in QE — potentially undermining the policy’s effectiveness even as it has been extended to battle the coronavirus pandemic.

In its judgement, the German court also blasted the Court of Justice of the European Union, which had previously found no problem with the ECB’s bond-buying.

Lagarde reiterated Thursday that the ECB is “a European institution with competence in the euro area… under the jurisdiction of the European Court of Justice”.

The German judges demanded in particular more details about the pros and cons of the ECB’s 2.2 trillion euros ($2.4 trillion) of government bond purchases since 2015, under a programme known by the initials PSPP.

By buying up government bonds, QE is designed to drive private investors’ cash into riskier investments, stoking economic growth and in turn powering inflation towards the ECB’s goal of just below two percent.

On top of PSPP, the ECB has launched a further 750-billion-euro bond-buying scheme known as PEPP to counter the impact of the coronavirus crisis.