I think key to Luther's thought is that the church is holy in its "recognition" of its sinfulness. Not necessarily its sinfulness itself, but the recognition of it. I believe this is one reason why the reformers (but unfortunately not their
epigones) retained individual confession and forgiveness (penance) as a
quasi-sacrament, because the holiness of the church is dependent on its
recognition of sin.
Of course, we are "made" holy in the absolution, the declarative "you
are forgiven for Jesus' sake", so in another sense it is not purely the
recognition that makes holy, but the parallel (and identical) move to
absolve (the more Catholic minded would then go on to debate how much
"follow-up" would need to occur after the absolution is necessary, the
"I intend to do better").
I think some Roman Catholic theologians (and even a few Lutheran ones) need the church to "not sin" at least from a dogmatic perspective because it is the only way to protect the magisterium and the "infallibility" of the pope when he speaks ex
cathedra. The sinlessness of the church is a doctrinal point for
Catholics is not unlike the fundamentalist doctrine of Biblical inerrancy.
Both are truth claims of a foundationalist sort, or at least that is my
read, and both are claims not so much based in reality, but rather in
defense of a dogmatic point. So, the bible is inerrant because it is
handed to us by God (and we need this to be true for the book also to be true), never mind its origins as a book written by human hands. Or, the church is sinless because this is the only way the tradition can truly be the living voice of God through the ages, never mind that certain specific popes, churches, bishops, over the centuries
have been notorious sinners and poor theologians.
If we re-visit the comparison between the Christological doctrine of
Christ as maximus peccator (greatest sinner) and relate that to ecclesiology, I think we gain some key insights. In fact, I think it is always useful to compare
doctrines in this way. Christ is not a sinner in se, but rather, takes
the sin of the whole world on himself, for the sake of the world. So
Christ is "the greatest sinner" only in the sense that he stands as
proxy, he stands in for and takes on all sin. In this way, he is the
The church is holy inasmuch as it participates in this reality. So, it
is holy when it a) recognizes its sin, and the once for all taking on of
this sin by Christ, and b) recognizes its participation in this divine
taking on of sin for the sake of the world. In other words, the church
can appear as sinner, can even bear the sins of the world, and bear with
one another, because of its newfound role as participants in the life of
Christ, who is maximus peccator.
I'm thinking specifically of some Pauline passages, like "we have become
the rubbish of the world, the dregs of all things" (1 Cor. 4:13). Or
again 2 Cor. 6:8, "in honor and dishonor, in ill repute and good repute.
We are treated as imposters, and yet are true; as unknown, and yet are
well known, as dying, and see--we are alive."