Yves Mersch: Legal aspects of the European Central Bank's
response to the coronavirus (COVID-19) pandemic - an exclusive
but narrow competence
Keynote speech by Mr Yves Mersch, Member of the Executive Board of the European Central
Bank and Vice-Chair of the Supervisory Board of the European Central Bank, at the ESCB Legal
Conference, Frankfurt am Main, 2 November 2020.
* * *
Exploring the legal framework governing the ECB's actions - scope and general legal
principles
When exploring the scope of our actions we are cognisant that the ECB has exclusive but
narrow competence to define the European Union monetary policy for the purpose of maintaining
price stability. Moreover, the European Court of Justice has consistently held that the ECB enjoys
broad discretion in defining monetary policy within its mandate to pursue the objective of price
stability. Discretion without limits increases the risk of arbitrariness. Therefore the Court has
insisted on being able to control this discretion on the basis of the criteria that some refer to as
the self-imposed constraints. Furthermore, we are bound to respect certain established legal
principles. Our measures must be proportionate to the ECB's legitimate objectives. They must
not undermine the spirit of the "no bailout clause" and must also comply with the prohibition of
monetary financing, which is its monetary policy counterpart. Last of all, the principle of an open
market economy in which resources are allocated efficiently must also be respected. These are
the constitutional red lines for our actions.
Our bold monetary policy response to the pandemic provides ample liquidity and acts as a
backstop: the liquidity provided via the targeted longer-term refinancing operations (TLTROs) and
the pandemic emergency longer-term refinancing operations (PELTROs) both of which are
supported by collateral easing measures, in addition to asset purchases through the continuation
of our asset purchase programme (APP) and the launch of our pandemic emergency purchase
programme (PEPP). These measures endeavour to respect the principles I have just mentioned
in order to be legally sound.
First, all the instruments deployed in response to the pandemic are provided for in primary EU
law (Article 18.1 of the Statute of the ESCB): to achieve its objectives, the ECB may operate in
the financial markets by buying and selling marketable instruments outright, and may conduct
credit operations based on adequate collateral.
Second, the crisis measures taken pursue monetary policy objectives with due respect to the
aforementioned "no bailout clause". Without forceful action, the singleness of our monetary policy
and the effectiveness of the transmission mechanism would have been put at risk.
Third, the measures we have taken are temporary, targeted and proportionate in nature.
We have disenfranchised ourselves from the previously self-imposed constraints so that these
measures can address the uncertainty of the evolving crisis. They are also designed in such a
way that they should preserve market functioning and price formation mechanisms.
PEPP - a flexible instrument to fight the crisis within our mandate
I would now like to take a closer look at the legality of our most far-reaching and exceptional
monetary policy decision, the launch of the PEPP. Let me first look at its features.
The PEPP was established to act first as a backstop to potential market disruption. In short, it
has had a stabilising effect to counteract the market fragmentation that was unwarranted on the
basis of the underlying economic fundamentals, and to safeguard the transmission mechanism.
The PEPP also reinforces the ECB's monetary policy stance. In so doing, the PEPP is a direct
1
and targeted response to an "extraordinary and acute economic crisis" and aims to ensure the
ECB's ability to fulfil its mandate under the circumstances.
Notably however, "Due to these exceptional, fast-evolving...circumstances, the PEPP requires a
high degree of flexibility in its design and implementation" as set out in the Decision implementing
2
the PEPP. Purchases under the PEPP continue to be guided by the capital key of the national
central banks as for the APP. But the PEPP allows for fluctuations in the distribution of
purchases over time, across asset classes and among jurisdictions. This flexibility has allowed
us to effectively stave off risks to the smooth transmission of monetary policy.
In view of the pandemic's exceptional nature, we decided not to apply to the PEPP the same
selfimposed public purchase limits that apply to the sovereign purchases under the APP. But, we will
conduct purchases only to the extent this is necessary and proportionate to fulfil our mandate.
In short, the PEPP is a targeted, proportionate and temporary measure in response to the crisis
triggered by the COVID-19 pandemic.
The legality of the PEPP is ensured for three reasons:
First, and as I mentioned earlier, the PEPP falls within the ECB's mandate in that it pursues
monetary policy objectives. As in the Gauweiler case, the measures designed to preserve the
monetary policy transmission mechanism may be regarded as seeking to maintain price stability.
Let me add that the argument invoking the transmission mechanism cannot be used to ease
credit risk premia which are due to the idiosyncratic economic and financial situation of a
country.
Second, in accordance with the PEPP Decision, "Purchases shall be carried out...to the extent
3
deemed necessary and proportionate". The proportionality assessment of the PEPP must be
supported by economic analysis which shows that the measure: (i) is suitable for attaining the
monetary policy objective in current and future environments; (ii) does not go beyond what
is necessary in order to achieve this objective; and (iii) weighs up the various interests involved
to prevent any disadvantages which are manifestly disproportionate to the objectives set.
In this context, the Governing Council assessed the PEPP's potential impact and direct and
indirect effects, and took into account comparative elements and counterfactual scenarios to
ensure that it was "the most effective and efficient tool for providing additional monetary
4
accommodation in the current environment". The Governing Council considered the PEPP to be
the most appropriate instrument compared with a recalibration of standard policy tools, such as
interest rate cuts.
In the Weiss judgement, the European Court of Justice confirmed that the ECB must be allowed
broad discretion in making these complex assessments, but within strict criteria. The PEPP
complies with the proportionality principle as it is both suitable and necessary to attain the
monetary policy objective. The PEPP contains important safeguards, such as stringent eligibility
criteria also contained in the APP. However, on account of its flexibility, these stringent criteria
are arguably fewer under the PEPP than under the APP. This is why the PEPP must be strictly
temporary in nature (the temporary nature also becoming a stringent criterion) and targeted to
comply with those strict criteria.
Last of all, although the ECB decided not to apply issuer and issue limits, the allocation of public
sector purchases will be guided by the capital key of the NCBs.
The PEPP's flexibility should not undermine the safeguards and limits set by the ECB in its
purchase programmes to keep within the constitutional red lines I mentioned earlier. Even if the
extraordinary context of the crisis might lead to further reflection on some of these established
principles, the ECB has made a public commitment to respect these red lines, and for good
reasons. Importantly, PEPP purchases are separate from and cannot be consolidated with APP
purchases. This means that the PEPP remains a distinct monetary policy measure in
comparison to the APP. In keeping with these safeguards the APP will also not inherit the
features of the PEPP.
The flexibility embedded in the PEPP cannot be unconstrained, and we must ensure that the
ECB continues to operate within the limits of its competence.
Collateral easing must be strictly temporary and not come at the expense of
fragmentation
Another aspect of our response to the crisis was the unprecedented set of temporary collateral
easing measures that we announced in April 2020. These measures continue to support our
liquidity operations and ensure continued collateral availability. For example, we decided to
extend national additional credit claim (ACC) frameworks to include loans benefiting from public
guarantee schemes related to the COVID-19 crisis even if they lead to increased fragmentation
temporarily. We also took the decision to maintain the eligibility of issuers and marketable assets
in the event of a deterioration in credit ratings during the crisis.
The legality of these measures is ensured through compliance with all the generally applicable
principles I mentioned earlier. More specifically, their legality is safeguarded by virtue of the risk
management measures with which they are associated, to ensure that the Eurosystem would
not suffer losses if the collateral were realised. In this way, the ACCs which are not loss sharing
like the standard monetary policy instruments, can be classified as "adequate collateral" in
accordance with Article 18.1 of the Statute of the ESCB. Even though the tools we use are not
new and had been deployed previously, we adapted them further during the current crisis. At the
same time, our actions complemented other European or national policies, such as the provision
of public sector guarantees on the fiscal side. Taken together, these measures have reinforced
the effectiveness of liquidity support offered to the real economy.
We should ensure, however, that the collateral easing measures do not inadvertently lead to
further fragmentation and the re-introduction of a Tier-2 collateral framework. More importantly,
they should respect the level playing field throughout the euro area. It is true that the expansion of
the ACC frameworks can increase the overall complexity and opaqueness of the ACC collateral
landscape. The country-specific legal and institutional features of these frameworks could give
rise to additional legal risks in relation to our collateral framework. Therefore, as with the PEPP, it
is crucial that our collateral easing packages are designed as strictly temporary measures that
will remain in place until September 2021 or only as long as the direct consequences of the
pandemic are with us.
Ample liquidity: refinancing operations (TLTRO III, PELTROs)
Also in keeping with our mandate, I would like to briefly mention that we have been able to rely on
the traditional tools we have at our disposal. For example, we have made changes to our existing
refinancing operations and introduced new pandemic emergency longer-term refinancing
operations (PELTROs) in order to provide credit to the banks and the real economy.
As a result, we have seen a surge in the provision of credit in support of the real economy as well
as a related knock-on effect on asset prices.
Supervisory measures - the need for an innovative approach to tackle the crisis
I would now like to look at the supervisory side, where the ECB has had to take an innovative
approach to tackling the crisis.
As I mentioned earlier, what is true for our bold monetary policy response to the pandemic is also
true for our supervisory response: our measures are exceptional and temporary and within the
regulatory boundaries of the internationally agreed framework.
The ECB was one of the first supervisory authorities to recommend that all banks under its
supervision restrict their dividend distributions in the light of the impact of the COVID-19
pandemic. Soon after our announcements in March, other supervisory bodies around the world
followed suit with similar measures. While not binding, most banks have followed the ECB's
recommendation. The recommendation exceptionally has adopted a "one-size-fits-all" approach
owing to the current economic uncertainty banks are experiencing, leaving them quite simply
unable to forecast their medium-term capital needs accurately. We will review this
recommendation in December, and unless we conclude that the banks' capital projections
remain clouded by exceptionally high uncertainty, we should revert to our usual supervisory
practice of assessing the planned distribution of dividends on a bank-by-bank basis, taking into
account the safety and resilience of the banking system as well as the preservation of its
intermediation function at a time of deteriorating asset quality and increased capital consumption.
Another new development concerns the leverage ratio. On the basis of the amendments to the
Capital Requirements Regulation, ECB Banking Supervision has allowed significant credit
institutions to exclude central bank exposures from the calculation of their leverage ratios until
July 2021. ECB Banking Supervision has cooperated with and sought the views of the ECB's
central bank function in order to tailor the scope of this temporary exemption so that it covers
only those claims on the central bank that are related to the implementation of monetary policy.
The measures in relation to dividends and the leverage ratio, as well as the other measures
providing temporary capital, liquidity and operational relief to banks, are exceptional measures
which are justified as long as the impact of the COVID-19 crisis continues to be felt. We may
also decide to discontinue some of these measures, as we did for some of the operational relief
measures in July. As with our monetary policy tools, we are closely monitoring the situation and
we will review our approach on a regular basis.
Independent of the ECB's actions, banks need to perform proper risk management, acknowledge
the recognition of impairments, and book an appropriate level of provisions.
I would now like to turn briefly to the subject of central bank digital currencies (CBDCs) and how
the pandemic has had an impact on them.
The arguments in favour of CBDCs have intensified during the pandemic; one of them is
reaffirming the role of central banks as the sole issuers of money. Although these arguments are
legitimate, they do not necessarily tip the scales in favour of immediate action in favour of CBDC
issuance. This is due to the many legal, operational and policy issues around CBDCs which
remain unresolved, standing in the way of a transition from traditional cash to CBDCs. I have
touched on those issues in some of my previous speeches. Suffice to say that the issues in
question will continue to provide food for thought for the ECB, euro area NCBs and central banks
throughout the world as they further explore the costs and benefits of CBDCs.
Conclusion
Let me conclude.
In the blink of an eye, the coronavirus pandemic and the response to it placed the global
economy in an induced coma. The ECB has acted forcefully and well within its mandate. Our
crisis response shows that our legal framework is flexible, but only up to a certain point. The
efficiency of our response has been strengthened by the concurrent reaction on the fiscal side
which is more useful than excessively stretching the monetary policy mandate.
Our crisis measures must be temporary and targeted. They are justified only in the light of the
exceptional circumstances seen during the pandemic. Extraordinary times require extraordinary
action. As the crisis evolves and subsides, the ECB will reconsider its tools and supervisory
practices.
1
Recital 3 of Decision (EU) 2020/440 of the European Central Bank of 24 March 2020 on a temporary pandemic
emergency purchase programme (ECB/2020/17) (OJ L 91, 25.3.2020, p. 1).
2
Recital 3 of Decision (EU) 2020/440 of the European Central Bank of 24 March 2020 on a temporary pandemic
emergency purchase programme (ECB/2020/17) (OJ L 91, 25.3.2020, p. 1).
3
ibid., Article 4.
4
Account of the monetary policy meeting of the Governing Council of the European Central Bank held in Frankfurt
am Main on Wednesday and Thursday, 3-4 June 2020, available on the ECB's website.