German top court (Federal Court of Justice) rules country’s central bank must justify bond-buying under European Central Bank stimulus scheme.
Germany’s central bank, the Bundesbank, must stop buying government bonds under the European Central Bank’s long-running stimulus scheme within three months unless the ECB can prove the purchases are needed, Germany’s top court ruled on Tuesday.
The verdict deals a blow to the 2-trillion-euro ($2.17 trillion) Public Sector Purchase Programme (PSPP) credited with keeping the euro zone economy afloat over the past five years.
With the European Court of Justice the top court in matters of European Union law having already cleared that scheme, Tuesday’s ruling also raises questions about the future of the EU and the resilience of its institutions.
The Constitutional Court judges in Karlsruhe did however leave open a loophole for continuing the scheme if the ECB can show it is necessary despite its “negative effects”, such as endangering taxpayer money and making governments increasingly reliant on central bank funding.
They also said their decision did not apply to the ECB’s pandemic-fighting programme, a 750 billion euros ($815bn) scheme approved last month to prop up the coronavirus-stricken euro zone economy.
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The ECB policymakers are discussing the ruling at a virtual Governing Council meeting on Tuesday, a spokesman for the bank said.
The PSPP currently accounts for less than a quarter of the ECB’s monthly bond purchases.
Germany’s top court objected to the Bundesbank’s participation in it saying among other side effects the purchases posed risks for state finances, resulted in the loss of private savings and maintained unviable companies.
“The Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates … the PSPP transactions are not disproportionate to the economic and fiscal policy effects,” the judges said.
They added the German central bank must also sell the bonds already bought, which were worth 533.9 billion euros ($578.9bn) at the end of April, albeit based “on a possibly long-term strategy coordinated with” the rest of the euro zone.
But they said the scheme did not amount to directly financing the government, which would put it in breach of EU Treaties.
Commerzbank economist Joerg Kraemer expected the ECB to easily convince the judges about the necessity of the purchases.
“With its armada of specialists, it will be easy for the ECB to carry out such a check,” Kraemer said. “The ECB’s bond purchases will continue. Today’s ruling won’t change that.”
But Luis Garicano, a Spanish liberal member of the European Parliament, said the ruling posed a threat to the future of EU institutions.
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“Very worried about the future of Europe post (the verdict). Europe cannot work if national Constitutional Courts decide unilaterally … Expect Hungary’s and Poland’s constitutional court to follow this precedent,” he said in a Twitter posting.
German bonds and the euro sold off after the ruling, with the benchmark 10-year Bund yield climbing to briefly touch a session high of -0.517 percent.
Amassing nearly 3 trillion euros ($3.25 trillion) of bonds since 2015, the ECB has long relied on asset purchases to support the economy through crises and a threat of deflation.
As the central bank of the euro zone’s largest economy, the Bundesbank has taken the lion’s shares of those purchases.
But a group of academics in Germany has long argued that the ECB is overstepping its mandate, and that these buys constitute direct financing of governments.
While the ECB primarily responds to the European Court of Justice, the Bundesbank is subject to German courts.
With much of the euro zone now in lockdown to halt the spread of the coronavirus, the ECB plans to print another 1 trillion euros ($1.08 trillion) to run the pandemic-fighting programme and help keep borrowing costs down for companies and governments.
