The German Federal Constitutional Court’s ruling has shone a light on the ECB’s ambiguous behaviour

On 5 May 2020, Germany’s Federal Constitutional Court asked the ECB to explain how its actions were consistent with its mandate of price stability. The court’s judges want the ECB to demonstrate that it has not breached its mandate or the European treaties in implementing its massive government bond purchase programmes since 2015, and that these programmes were designed to fulfil the ECB’s mandate (inflation of close to 2%) and not to directly finance euro-zone governments. But the court’s decision underscores the ambiguity or even hypocrisy of the ECB’s behaviour. In reality, it is monetising public debt to keep governments solvent; that it is buying the government bonds in the secondary market and not the primary market changes nothing about the fact that this is still monetisation. Money creation is clearly being used to help governments finance themselves and to prevent debt crises, and not to lift inflation back up to 2%. As long as inflation remains low, however, the ECB will be able to continue to claim that its objective is to return it to 2%. But it will need to consider the inflationary risk related to the coronavirus crisis.