The German Federal Constitutional Court Ruling and the European Central Bank's Strategy

Abstract

The ruling of the German Federal Constitutional Court and its call for conducting and communicating proportionality assessments regarding monetary policy have been the subject of some controversy. However, it can also be understood as a way to strengthen the de facto independence of the European Central Bank (ECB). This article shows how a regular proportionality check could be integrated in the ECB's strategy, which is currently undergoing a systematic review. In particular, it proposes that quantitative benchmarks for policy rates and the central bank balance sheet should be included. Deviations from such benchmarks can have benefits in terms of the intended path for inflation while involving costs in terms of risks and side effects that need to be balanced. Practical applications to the euro area are provided.