German court rules the ECB must justify its asset-purchase programme
The ruling raises questions about just how far the European Central Bank can push its monetary stimulus
Brussels — European Central Bank (ECB) policymakers will jump on a conference call on Tuesday evening to plot how to respond to a surprisingly critical court ruling that cast doubt over their biggest crisis-fighting programme.
Officials now have just three months to prove to Germany’s highest court that the asset-purchase programme, which has bought €2.7-trillion of debt since 2015 and is adding more each month, is in line with the law.
Tuesday’s ruling won’t stop purchases immediately and it doesn’t affect a separate €750bn programme launched in March to combat the coronavirus crisis. It does, however, raise questions over just how far the ECB can push its monetary stimulus.
The decision is a “legal bombshell”, said Holger Schmieding, chief economist at Berenberg. “Whether the German constitutional court’s restrictions have an impact on market perceptions as to how effective the ECB can respond to the current economic emergency remains an open question.”
The initial response of investors was shock — the euro slid and was down 0.4% at $1.0860 at 4.47pm. Frankfurt time. Bond yields fluctuated before rising in stressed economies, such as Italy.
The lawsuit was filed by a group of businesspeople and academics, frequent critics of the EU, who argued that the ECB is improperly conducting economic policy instead of just monetary policy. A key concern is whether sovereign bond purchases break EU law banning direct financing of governments.
German finance minister Olaf Scholz played down the judgment, saying the court “clearly ruled” that quantitative easing (QE) isn’t monetary financing and the programme complies with the German constitution.
He also said it shows the need to “further deepen and intensify European co-operation” — implicitly acknowledging the burden the ECB has taken on as governments struggle to agree on joint fiscal stimulus to tackle the coronavirus.
QE not backed by treaties
That’s a risk for the currency bloc. The ruling could have excluded the Bundesbank from the asset purchase programme, which is running at €20bn a month with an additional €120bn as part of measures to combat the current downturn. With Germany the eurozone’s biggest economy, its central bank accounts for the biggest share of purchases.
“Today’s German constitutional court ruling means the ECB will justify its policy actions within three months, but in the meantime, at least, there is no material roadblock to asset purchases going ahead,” said Bloomberg economist Jamie Rush.
Instead, in a complex decision, the judges ruled 7-1 that QE isn’t backed by EU treaties, and said German authorities should have challenged it. They said the ECB should have discussed a number of factors on how QE may have affected a wide swathe of the economy, including shareholders, renters and insurance buyers.
Bundesbank president Jens Weidmann, a frequent critic of QE, responded to the ruling by saying it “highlights important features” of the programme — such as limits on how much debt can be bought — that ensure a “sufficient safety margin” against monetary financing, and that he has stressed the importance of such a margin in the past.
But the judges also offered a way out, telling the Frankfurt-based central bank to come back within three months with a justification for its policy.
The ruling “only concerns the duty of the ECB to scrutinise its own action under a proportionality guideline and to document that”, said court president Andreas Vosskuhle. “The ECB isn’t, per se, blocked in any way.”
Yet it still raises the prospect of future challenges to a stimulus programme that the ECB insists is a key part of its measures to revive the economy and restore inflation. It also opens the door to action against the pandemic programme, which is stripped of most of the limits that constrained QE.
“For me, this suggests it will never end and therefore we will constantly face questions on how far the ECB can go,” said Lucas Guttenberg, deputy director at the Jacques Delors Centre in Berlin. “Politically it means we can’t rely on the ECB to save the day because we simply don’t know when the line will eventually be drawn.”
The decision has wider implications for the EU, testing the relationship between the EU court of justice and national courts. In 2017, the judges asked the EU court for an interim ruling aimed at limiting the ECB’s leeway, but the tribunal rejected that restrictive reading of the law.
Joachim Wieland, a law professor at the University of Administrative Sciences, said the latest German ruling “is an invitation for other countries to simply ignore decisions that they don’t like”.