On 18 March 2020, the European Central Bank (ECB) announced a EUR750 billion bond purchase programme called Pandemic Emergency Purchase Programme (PEPP) to address the economic and financial fallout from COVID-19. The PEPP has been hailed as Christine Lagarde’s very own ‘whatever it takes’ moment (although it came after some hesitation whether the ECB should stop the slide in euro area sovereign bond prices). The first weeks of PEPP purchases showed that the programme works, with bonds spreads between the countries hardest hit by the COVID-19 pandemic and those with less cases gradually returning to normal levels.
Still, the PEPP remains controversial. Some members of the ECB’s own decision-making body, the Governing Council, voiced concerns that the risks of limitless bond purchases could outweigh the potential benefits, given that financial conditions had already been loose for long. The new bond-buying programme is yet another exceptional measure that will reinforce the ECB’s role as the euro area’s ultimate firefighter, making it a likely target for legal challenges before the Court of Justice of the EU (CJEU).
But is the ECB’s PEPP legal? In my new paper, I answer this question to the affirmative.
Specifically, I argue that the PEPP complies with the boundaries set by the Court in two seminal decisions. In the first case, Gauweiler, the CJEU confirmed that the Outright Monetary Transactions (OMT) programme, which implemented President Draghi’s ‘whatever it takes’ promise, complied with the EU Treaties because it was a necessary and proportionate measure to restore the functioning of monetary policy transmission channels in the EU. In the second case, Weiss, the Court extended the principles developed in its OMT judgement and clarified that the ECB may also conduct large-scale purchase bonds in the secondary market for the purpose of fending of deflation risks, provided that it sticks to certain self-imposed safeguards.
Both in Gauweiler and Weiss the CJEU focused on whether the respective bond-purchase programmes complied with the proportionality requirement under EU law and the prohibition of monetary financing in Art. 123 of the Treaty of the Functioning of the EU (TFEU).
According to the CJEU, a measure by the ECB is proportionate if it is (i) suitable to fulfil the price stability objective and (ii) necessary to achieve that objective. With regard to suitability, the Court requires measures adopted by the ECB to not be ‘vitiated by a manifest error of assessment’ (para 74). In other words, they must not be obviously misguided from an economic standpoint to achieve the price stability objective. The necessity requirement implies that ECB measures must not ‘go manifestly beyond what is necessary to achieve [the price stability] objective’. The monetary financing prohibition enjoins the ECB from buying bonds from the primary market, or conducting secondary market purchase with an equivalent effect.
Applying the Court’s canon to the PEPP, I conclude that both the objectives and the design of the ECB’s new programme are proportionate and in compliance with the monetary financing prohibition.
First, the PEPP’s objectives are proportionate because they address a malfunctioning of the smooth transmission of monetary policy signals across the currency area triggered by the sudden stop in economic activity. Similar to the OMT programme, the PEPP addresses a serious disruption in euro area sovereign bond markets that risked—and continues to risk—undermining the singleness of monetary policy and is therefore suitable and necessary to the maintenance of price stability.
Second, PEPP’s design is proportionate as the bond-buying programme is not limitless. Rather, the built-in safeguards ensure that the measures do not go beyond what is necessary in order to fulfil the ECB’s objectives, thus reflecting the pertinent CJEU jurisprudence in Gauweiler and Weiss. Specifically, PEPP purchases are (i) limited in volume, (ii) restricted to periods of malfunctioning monetary policy transmission channels, (iii) not selective (i.e. the ECB acquires bonds of all Member States), (iv) limited to securities with stringent eligibility criteria, and (v) subject to a limited loss-sharing arrangement.
Finally, the PEPP does not breach the monetary financing prohibition because it (i) has no equivalent effect to bond purchases on primary markets (due to the safeguards mentioned previously) and (ii) does not incentivize Member States to pursue ‘unsound’ budgetary policies. Indeed, there is near consensus among experts that the only ‘sound’ budgetary policy during a once-in-a-century pandemic is an expansionary fiscal policy aimed at alleviating the economic hardship it causes.
In sum, notwithstanding the unprecedented scope of recent ECB measures, the PEPP’s legality can be defended in light of the extraordinary threats to price stability triggered by the COVID-19 pandemic as well as the legal CJEU’s assessment of previous ECB bond purchase programmes.
Dr Sebastian Grund is an LLM student and a research assistant at Harvard Law School and a former legal adviser to the European Central Bank.