A lot of noise about nothing

Bond purchase programs in the eurozone are having a much smaller impact than claimed. This also applies to Italy. Should a court decide how the program ultimately worked? A guest post.

Central bank independence also depends on trust that it will generally make the right decision.

DThe Federal Constitutional Court passed a remarkable judgment on May 5th: The decisions of the ECB on the government bond purchase program (“PSPP”) are incompetent. If the ECB does not document in a comprehensible and thorough manner within a transitional period of three months why the program is proportionate, the Deutsche Bundesbank is no longer allowed to participate. It could go on, but without the largest euro zone member Germany.

First of all: Supreme court decisions are binding. As economists, we can comment and criticize the economic analysis that lies behind the decision. We leave the legal and political assessment to others. This ruling concerns the program under which over EUR 2 trillion in government bonds were purchased by November 8, 2019. It is telling that there is talk in public that “the ECB is buying government bonds”. But this is not the case: it is the 19 national central banks of the countries that belong to the euro area that carry out these purchases on their own account. The court therefore speaks more accurately of purchases by the Eurosystem in its judgment.