Germany’s top court on Tuesday gave the European Central Bank three months to justify bond purchases under its flagship stimulus program or lose the Bundesbank as a participant, raising questions about both the scheme and the euro’s future.
The verdict dealt a blow to the unprecedented 2-trillion-euro purchase scheme that helped kick-start the euro zone economy after its financial and debt crises of a decade ago, but which critics argue has flooded markets with cheap money and encouraged overspending by some governments.
It also put the Constitutional Court in Karlsruhe at loggerheads with the European Court of Justice, the highest court in matters of European Union law, and which had cleared the Public Sector Purchase Programme (PSPP) in 2018.
As European bonds and the euro fell, the EU’s executive commission reaffirmed “the primacy of EU law” within the bloc, and an ECB spokesman said the bank’s governing council would hold an unscheduled meeting later in the day.
The Karlsruhe court judges left leeway for the Bundesbank – the biggest participant in PSPP – to continue in the scheme if the ECB could show it was necessary, despite “negative effects” such as risking taxpayer money and making governments reliant on central bank funding.
German Finance Minister Olaf Scholz said the three months granted to the ECB to demonstrate the necessity of the scheme was “quite a long time period,” and the Bundesbank could stay in it for the time being.
The ECB’s separate pandemic-fighting purchase scheme – a €750-billion program approved last month to prop up the coronavirus-stricken euro area economy – remained unaffected, as the Constitutional Court said its decision did not apply to that.
PSPP, meanwhile, currently accounts for less than a quarter of the ECB’s monthly bond purchases.
The court said the Bundesbank could no longer be part of it “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.
The judges added the German central bank must also sell the bonds already bought, which were worth €533.9-billion at the end of April, albeit based “on a – possibly long-term – strategy co-ordinated with” the rest of the euro zone.
But they said the scheme did not amount to directly financing governments, which would put it in breach of European Union Treaties.
EASY WAY OUT, OR INSTITUTIONAL MINEFIELD?
While the court did not spell out the kind of proof it was demanding of the ECB, it referred to the effects of the bank’s policy “on virtually all citizens ... as shareholders, tenants, real estate owners, savers or insurance-policy holders”.
The ECB has credited its stimulus efforts with creating 11 million jobs since 2013, but critics have said it has helped to create bubbles in real estate and depressed returns on safe investments such as pension schemes, savings accounts and government bonds.
Commerzbank economist Joerg Kraemer expected the ECB to easily convince the judges that the benefits of its purchases far outweighed the costs.
“With its armada of specialists, it will be easy for the ECB to carry out such a check,” Mr. 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.
“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.
The Karlsruhe judges decided they were not bound by the earlier ruling as the ECJ had failed to scrutinize the ECB’s actions to the point of making its own verdict “meaningless”.
While the ECB defers to the EU court, the Bundesbank is subject to German courts.
“As there’s no hierarchy between national courts and the EU court of justice, both of their jurisprudence stand,” said Alberto Alemanno, a professor of EU law at the HEC business school in Paris
“Tuesday’s ruling must be interpreted as a clear warning by the German court to EU constitutional order to stay within its own boundaries,” he added.
Amassing nearly €3-trillion of bonds since 2015, the ECB has relied on asset purchases to support the economy through crises and a threat of deflation.
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.
With much of the euro zone now in lockdown to halt the spread of the virus, the ECB plans to print another €1-trillion to run the pandemic-fighting program and help keep borrowing costs down for companies and governments.
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