Isabel Schnabel says constitutional row ‘does not directly affect’ eurozone’s central bank

The European Central Bank intends to shrug off the German constitutional court’s ruling against its flagship bond-buying policy and expects Germany’s central bank to resolve the legal impasse, according to one of the eurozone institution’s top executives.
Isabel Schnabel, the German economist who joined the ECB board in January, told the Financial Times in an interview: “We are not adjusting our monetary policy in any way in response to this ruling.” She added that the court ruling “does not directly affect us” and instead was likely to be dealt with by the Bundesbank.
Germany’s highest court sent shockwaves through Europe earlier this month by ruling that officials in Berlin and the EU’s top judges had failed to properly scrutinise the ECB’s €2.2tn sovereign bond-buying programme — exposing deep faultlines at the heart of the single currency bloc.
The court in Karlsruhe ordered the German government and parliament to ensure that the ECB provided a “proportionality assessment” of its bond-buying to check that its “economic and fiscal policy effects” did not outweigh other policy objectives.
It told the Bundesbank that if the ECB failed to comply within three months, it must stop buying bonds and plan to sell the more than €500bn it holds.
Germany is one of the countries that has benefited a lot from the euro and therefore it shouldn’t be the country that is most critical about it
Isabel Schnabel, German member of the ECB board
But Ms Schnabel, a former economics professor at the University of Bonn, underlined the ECB’s resolve to rise above the ruling by signalling that next week it is likely to expand the size, scope and timeframe of the €750bn pandemic emergency purchase programme (PEPP) bond-buying scheme it launched in March. She said the stand-off would not be allowed to inhibit ECB bond purchases.
“We have to avoid a situation in which one national central bank cannot participate in our asset-purchase programmes,” she said.
Investors worry that the ruling may constrain the ECB’s ability to provide more monetary stimulus just as Europe confronts its deepest postwar recession.
But Ms Schnabel, who oversees bond-buying as head of the ECB’s market operations, rejected this and said “we have to continue to act forcefully”.
“I’m sure there is going to be communication between the Bundesbank and the German parliament and the German government, and one will have to find a solution. If the ECB can be constructive in supporting that process, we will of course do so,” she said.
The ECB’s governing council will next week hold an online meeting to discuss its monetary policy and decide on new economic forecasts, when most analysts expect it to expand the PEPP.
Ms Schnabel said: “One number . . . of particular interest is the evolution of the medium-term inflation outlook. If we see that the situation has deteriorated, and if we judge that further stimulus is needed then the ECB will be ready to expand any of its tools in order to achieve its price stability objective.”
In March, the ECB forecast that eurozone inflation would rise from 1.1 per cent this year to 1.6 per cent in 2022. However, since then inflation in the 19-country bloc has fallen from 0.7 per cent in March to 0.3 per cent in April — far below the ECB’s main target of close to 2 per cent.
That raised fears of a deflationary spiral, increasing the chances of the ECB lowering its medium-term inflation outlook and injecting more monetary stimulus next week.
“With respect to the PEPP, this concerns the size but also the composition and the duration of the programme,” Ms Schnabel said. “We are ready to react to new data coming in.”
Criticism of the ECB is often fiercest in Germany, where it is regularly accused of bailing out profligate southern European countries at the expense of prudent savers in the north — a view echoed in the constitutional court ruling. Ms Schnabel has pledged to focus on better explaining the benefits of ECB policies to Germans.
“Germany is one of the countries that has benefited a lot from the euro and therefore it shouldn’t be the country that is most critical about it,” she said. “Many of the narratives that are very popular in Germany cannot be maintained because they simply do not match the facts.”
Asked about her biggest worry, Ms Schnabel said it was “disintegration, which would be very harmful”. She added: “Europe needs to continue on the path of economic and financial integration and make progress towards completion of the banking and capital markets union.”
The recent Franco-German proposal for a €500bn European recovery fund was “an encouraging step in the direction of more European integration”, she said, stressing that it was important that the fund had a “transfer element” to avoid merely adding to national debt levels.
The recovery fund proposal has eased investors’ fears about the sustainability of rising debt levels in countries such as Italy, Spain and Greece, helping to narrow the spread between their funding costs and those of Germany, a widely-watched barometer of eurozone political stress.
Ms Schnabel said the ECB did not target a specific level of bond market spreads, although it watched them “very carefully” for signs of a “quick divergence”.