Broad German Parliamentary Alliance Plans to Back ECB’s QE

(Bloomberg) -- A broad coalition of ruling and opposition parties in Germany has agreed on a draft motion to back the European Central Bank's bond buying program, according to officials familiar with the accord, likely ending a standoff that was triggered by the country's constitutional court last month.

Representatives of Chancellor Angela Merkel's coalition partners as well as the Greens and the Liberal Democrats agreed in principle on Monday to accept explanations the ECB provided on its so-called public sector purchase program, or PSPP, the officials said. Finance Minister Olaf Scholz earlier received ECB documents supporting its case from the Bundesbank and passed them on to Bundestag President Wolfgang Schaeuble, several other people said.

“The German Bundestag considers the ECB's statement to complete a proportionality check as comprehensive and the requirements of the ruling by the constitutional court thereby as fulfilled,” reads a passage of the draft motion seen by Bloomberg News.

The agreement has yet to be agreed by the party caucuses, and parliament will have a final say later this week, the people said. But a broad approval is seen as highly likely given that senior politicians from Merkel's Christian Democratic-led bloc are backing it and the Social Democrats as well as the Greens have long been supporters of the ECB's monetary policies.

A parliamentary sign off would fulfill the constitutional court's demand that the German Bundestag needs to review whether the ECB's bond-buying program is “proportionate.”

Germany's top court ruled in May that the 2.2 trillion-euro ($2.5 trillion) PSPP could be illegal. The judges said the German parliament should have challenged the ECB to show that it had considered adverse side effects, such as depressed returns on savings as well as financial instability. The judges ruled that if the program isn't shown within three months to be “proportionate” to the risks then the Bundesbank, the biggest buyer, will have to withdraw.

Scholz told Schaeuble that the ECB has fulfilled the demands of the constitutional court and that the Bundesbank is “permitted to continue to participate in the implementation and execution” of the PSPP, the Frankfurter Allgemeine Zeitung reported earlier.

The ruling triggered a debate as to whether a national court was infringing on ECB independence and seeking to override the EU's top tribunal. After weeks of looking for a way out of the stalemate, the ECB agreed to provide the documents explaining the bond-buying program to Bundesbank President Jens Weidmann.

Those documents highlight “how the ECB has assessed and continues to assess the proportionality of the PSPP and of all its instruments of monetary policy,” ECB President Christine Lagarde said on Monday as she offered another defense of the program in a letter to a German member of the European Parliament, Sven Simon.

Side Effects

“The ECB constantly evaluates whether its monetary policy measures -- including the PSPP -- achieve their intended purpose, are commensurate with the risks to our price-stability objective, and proportionate in their execution,” Lagarde wrote.

Those assessments include tests whether there's a predictable relationship between any particular instrument and an intended economic outcome, whether the tool used is efficient, and whether the calibration of a specific policy might have unintended consequences.

“The ECB's strategy review will also play an important role in reviewing the effectiveness, efficiency and potential side effects of our monetary policy toolkit,” Lagarde said.

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