Top German court asks European Central Bank to justify bond buying

Marco Green
May 5, 2020

The ECB has always been dependent on quantitative easing to shore up the euro area economy.

By buying up government bonds - so far totalling 2.2 trillion euros - QE is created to drive private investors' cash into riskier investments, stoking economic growth and in turn powering inflation towards the ECB's goal of just below two percent.

The case was brought by 1,750 people, including economists and lawyers, who argued that the European Central Bank programme breached the EU Treaties' prohibition of monetary financing of member state budgets, and constituted an invasion on the national competences and sovereignty in budget matters.

The PSPP accounted for some €2.1tn ($2.3tn, £1.8tn) in purchases between 2015 and 2018. The program faced objections from conservative German academics that it exceeds the bank's authority and violates a legal ban in the European Union treaty on financing governments. The judges also determined that the adequacy of the ECB's PSPP scheme was never thoroughly analyzed.

The judges said Germany's central bank must also sell €533.9bn of bonds already bought, though it does not have to rush the sale. The second outcome could depend on whether they can add some safeguards to make sure PSPP honors the principle of proportionality between economic and monetary policy.

As a result, the German court said it is "not bound by the CJEU's decision but must conduct its own review of within powers".

The court then gave the ECB three months to take steps to amend the scheme, otherwise the German central bank, the Bundesbank, could be barred from participating in the PSPP programme.

The ECB's new pandemic-fighting purchase scheme which was approved last month to help the coronavirus-stricken euro area economy will not be affected by this ruling, as the Constitutional Court stated that this decision does not apply to that programme and only to the PSPP.

Uwe Burkert, an economist at Landesbank Baden-Wurttemberg in Stuttgart, described the German court's verdict as "a very explosive thing".

The PSPP now accounts for less than a quarter of the ECB's monthly bond purchases.

However, Jorg Kramer, the chief economist at Commerzbank, thinks the bond buying scheme will continue. Italy, due to its enormous external debt and now lockdown-inflicted economic damage, has been heavily dependent on the bond purchase program.

Michael Hewson, chief market analyst at CMC Markets London, commented that the German court's criticism of the European Central Bank will likely "prompt enhanced scrutiny of current and future programs going forward, with all of the problems that might entail in terms of fast effective delivery of monetary policy".

"The good news is that the ruling does not seem to apply to the PEPP, but there is a bigger concern that it limits the ability of the European Central Bank to "do whatever it takes"... They'll need to muster all their creativity to come up with a response to satisfy the German Constitutional Court, and they need to work fast". With regard to the issue of proportionality, the German court said the ECB's measures related to the PSPP must be classified as "ultra-vires".

Other reports by Click Lancashire

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