Last week, the German constitutional court ruled that the large-scale purchases of government bonds by the ECB since 2015 fell outside the ECB’s legal competences. But the Court also held that this purchasing program did non violate the “prohibition of monetary financing of Member State budgets” in Art. 123 of the TFEU.
It’s unclear whether the ruling will have any effect in practice, because the Court allowed the ECB to continue its program provided they come up with some kind of explanation of what they are doing in the next few months (I’m simplifying).
I admit that I have no idea if the ECB transgressed its legal authorities. But I’m a little bit shocked by the second aspect of the ruling, the finding that the ECB did not provide monetary financing of Member States budgets.
Because the ECB clearly did.
The figure below shows the change in the aggregate outstanding debt of all Eurozone governments (blue line) as well as the change in the ECB’s holdings of such debt (red line) since 2010.
All Eurozone governments combined have issued 1.845 trillion euros* in new debt since 2010. During the same time, the ECB has increased its holdings of Eurozone government debt by 1.683 trillion euros. Ergo, the ECB has bought 91 cents of every euro of new debt issued by Eurozone governments. Notice also the clear break in the red curve in the year 2015. That’s exactly when the PSPP started.
How can this not be “monetary financing” of Eurozone governments?
*) All debt numbers here refer to face values, not market values, and are not adjusted for inflation.