The European Central Bank (ECB)‘s government bond purchases are necessary, and the benefits far outweigh the side effect, Isabel Schnabel, ECB board member, expressed on Saturday, pushing back on a court challenge from her native Germany.
Germany’s Constitutional Court ruled last month that the ECB overstepped its mandate with 2 trillion euros worth of government bond buys over the past five years and ordered the Bundesbank to quit the programme, unless the ECB could prove within three month that the purchases were proportional.
However, Schnabel said that ECB bond buys – sharply increased since the onset of the coronavirus pandemic – were vital in holding the bloc together and protect ordinary savers, contrary to the Court’s view and much of the criticism from Germany.
“For the average saver, the additional losses arising from our new policy measures are very small,” Schnabel said. “The measures taken by the ECB in response to the crisis have been necessary, suitable and proportionate to ensure price stability in the euro area.”
The ECB has agreed to around 1.5 trillion euros worth of additional government bond buys since the outset of the crisis, and to get the same accommodation with rate cuts alone it would need to cut the deposit rate to minus 1.7% percent, Schnabel argued.
“Had we instead cut the rate on the deposit facility to counter the current crisis, the estimated losses (for savers)would have been almost as large as the total losses accumulated over the course of the past six years,” she said.
Schnabel also pushed back on the proposal that keeping borrowing costs down for indebted euro zone members was beyond the ECB’s mandate and created moral hazard for governments.
“It would go against the very idea behind the common currency if we were to stand idly by and watch the pandemic carve a rift into the euro area and produce deep divisions that would endanger the return to a single monetary policy in the long run,” she said.
Reported by Balazs Koranyi