ifo President Fuest: German Constitutional Court Increases Pressure on Euro-Area Governments
The ifo President Clemens Fuest believes that the recent German Federal Constitutional Court ruling restricts the scope for the European Central Bank (ECB) to support highly indebted euro-area countries through bond purchases. “In turn, this puts increasing pressure on euro-area governments to provide assistance to individual member states in the form of fiscal policy instead of relying on the ECB,” Fuest said in Munich on Tuesday.
“In theory, only the Bundesbank is bound by these requirements, not the ECB. In practice, however, it is hard to believe that the bond purchases will take place in the future without the participation of the Bundesbank,” Fuest continued.
He explained that the court requires the ECB to publicly demonstrate that its bond purchases comply with the principle of proportionality. It must be able show that such purchases are justified when weighed against side effects such as the burden on savers or the impact on real estate prices. “The ECB should be in a position to provide this justification if it wants to comply with this requirement,” Fuest said.
He also explained that the Federal Constitutional Court was drawing up conditions to ensure that government bond purchases do not violate the prohibition on monetary financing of government spending. Under these conditions, the purchases would be made according to the capital key of the national central banks and no bonds would be purchased from countries that no longer had an adequate rating. “This limits the scope for buying Italian government bonds in particular,” Fuest continued.
