The Legality of the European Central Bank's Pandemic Emergency Purchase Programme
Delors Institute Policy Brief (March 25, 2020)
13 Pages Posted: 23 Mar 2020 Last revised: 15 Apr 2020
Date Written: March 21, 2020
The announcement of the Pandemic Emergency Purchase Programme (PEPP) by the European Central Bank on March 18, 2020 marks an unprecedented step in the European history of monetary integration. But it is a commensurate response to the global public health emergency that the COVID-19 outbreak continues to pose as well as the financial and economic shock that it triggered. The legality of the PEPP can be defended in light of both these extraordinary macroeconomic circumstances as well as the European Court of Justice's assessment of previous ECB bond purchase programmes. As this short essay shows, the Court’s Gauweiler and the Weiss decisions have defined the boundaries within which the ECB may design its monetary policy measures. And the PEPP does not transgress these boundaries.
However, in order to mitigate the risk of any ex-post legal challenges, the legal act on which the PEPP is based should underscore the following principles, which are informed by the pertinent case law:
1. The PEPP’s objectives are proportional because they address a malfunctioning of the smooth transmission of monetary policy signals across the currency area triggered by the sudden stop of economic activity, thereby undermining the singleness of monetary policy.
2. The PEPP’s design is proportional because it entails the following safeguards: bond purchases are (i) restricted to EUR750 billion, (ii) limited to periods of malfunctioning monetary policy transmission channels, (iii) not selective, (iv) limited to securities with stringent eligibility criteria, and (v) subject to a limited loss-sharing arrangement.
3. The PEPP does not breach the monetary financing prohibition because it (i) has no equivalent effect to bond purchases on the primary markets (due to the safeguards mentioned in 2.) and (ii) does not incentivize Member States pursue unsound budgetary policies.
Keywords: Monetary Policy; European Central Bank; Europe; Eurozone; COVID-19; Coronavirus; Pandemic Emergency Purchase Programme
JEL Classification: E58, H63
Suggested Citation: Suggested Citation