The German Constitutional Court rocked eurozone investors and touched the value of the euro after judges warned that the European Central Bank’s plans to flood the financial system with cheap credit could break German law.
The Karlsruhe court’s lightning decision came after judges agreed that the German central bank should stop cooperating with the ECB’s long-term stimulus program within the next three months, unless the ECB can prove that ‘it was not excessive.
Analysts said the decision highlighted constraints on the ECB as a lender of last resort compared to the more independent US Federal Reserve, the Bank of Japan and the Bank of England, while it was fighting the greatest economic crisis in peacetime after Covid-19. epidemic.
The ECB has already injected billions of euros into the reserves of the continent’s big banks to encourage them to lend to small businesses as part of a program created by former President Mario Draghi after the zone’s debt crisis euro in 2012.
Last month, Draghi’s successor, Christine Lagarde, said that the pandemic meant a new round of recovery under the banner of the public sector purchasing program (PSPP), leading many conservative politicians in Germany to accuse the ECB of have exceeded its mandate.
The court considered an allegation that the PSPP was illegal because it amounted to directly funding governments in the euro area. The judges concluded that the ECB had to prove that the program was justified, through “an assessment of proportionality”.
“The Bundesbank can therefore no longer participate in the implementation and execution of the ECB decisions in question, unless the Governing Council of the ECB adopts a new decision demonstrating that … the PSPP is not not disproportionate to the effects of economic and fiscal policy, ”they said.
Carsten Brzeski, analyst for ING, warned that the move could undermine the authority of the ECB and its ability to protect the eurozone’s financial system during a crisis.
He said that while the judges ruled out the latest £ 750bn (£ 653bn) injection linked to the pandemic, they agreed that the Bundesbank could be banned from participating in the quantitative easing program. long term of the ECB.
“An optimistic interpretation could be that it is a lot of barking without biting and that everything is fine as long as the ECB shows that it has thought through the economic consequences of its decisions. But a pessimistic interpretation could be that no further analysis by the ECB will convince the German judges and therefore could not mean the end of the QE, “he said.
The euro fell 0.7% to $ 1.0829 and is expected to experience its largest daily decline in more than a month.
Concerns over ECB support for eurozone governments, all of which have signaled a sharp increase in debt this year to finance coronavirus welfare and business subsidies, have pushed up the interest rate that the government has to pay on their debts.
Benchmark 10-year bond yields in the euro area were between two and nine basis points (bp) higher that day. The yield on the 10-year German Bund rose 2.5 basis points to -0.54%, while the Italian 10-year debt rate was 7 basis points up to 1.82%.
The court ruling first shook European stock markets and briefly wiped out gains earlier in the morning in hopes that global blockages would ease. However, stocks rallied later: the FTSE 100 rose 1.7%, the German Dax rose 2.5% and the French CAC rose 2.4%.
Some analysts said the three-month delay was reassuring and had cheered up after the initial panic. Kenneth Broux, a Societe Generale strategist, said: “The PSPP is violating German law, but I think the three-month deadline is important to clarify proportionality and the ECB can continue after that.
“This illustrates the difficulties compared to the Fed, for example; the Fed has no such constraints on the part of the American states to challenge the QE there, “he said.