German court calls on ECB to justify bond buying program

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The German Constitutional Court called on the European Central Bank to justify its large purchases of public sector debt and threatened to block further purchases of German bonds unless it does so within three months.

Ruling in a long-standing case on the legality of the ECB’s quantitative easing bond purchase program, the Karlsruhe court said that the German government and parliament had “a duty to take active measures against the »QE« in its current form ».

The Court also opened the door to further legal challenges to the ECB’s new € 750 billion emergency purchase program (PEPP), saying that purchases of earlier bonds were only acceptable because of a number of limitations which were later relaxed under the new program.

The ruling calls into question one of the key pillars of the euro area central bank’s political approach. The ECB has purchased more than € 2.2 billion in public debt since the QE was launched in 2014 in an attempt to stop a fall in inflation. In recent weeks, it has significantly increased its purchases to mitigate the economic consequences of the coronavirus pandemic.

However, the bond buying program has long been controversial in Germany, where critics argue that the central bank exceeded its mandate by illegally funding governments and exposing taxpayers to potential losses. The complainants – a group of around 1,750 people, led by German economists and law professors – brought their cases for the first time in 2015. They argued that the ECB was getting lost in the monetary funding of governments , which is illegal under the EU Treaty.

Their case was referred to the European Court of Justice, which ruled in favor of the ECB in 2018, but it was then referred to the German Constitutional Court, which on Tuesday rejected part of the ECJ’s previous decision, the calling it “methodologically untenable”. perspective ”.

On Tuesday, the German Constitutional Court exposed a long list of reasons why the ECB may have overstepped its mandate in a decision published on its website. But the court said it could not decide whether the ECB had breached EU law without further information on how the central bank balanced the economic and fiscal impact of its actions against its monetary policy objectives.

“Unless the ECB provides documents demonstrating that such balancing has taken place and in what form, it is not possible to carry out an effective judicial review to determine whether the ECB has respected its mandate”, a- he declared.

The court ordered the German government and parliament to ensure that the ECB performs a “proportionality assessment” of its public debt purchases to ensure that their “economic and fiscal policy effects” do not prevail not on its monetary policy objectives.

Most observers expected the Karlsruhe court to be reluctant to accept that ECB purchases of public debt were legal, and the court said it “did not find a violation of the ban on the monetary financing of the budgets of the Member States’. He added: “Today’s decision does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis. “

She said, however, that the German central bank would no longer be allowed to participate in public sector bond purchases if the ECB did not show that its policy was not disproportionate within three months. She added: “On the same condition, the Bundesbank must ensure that the bonds already bought and held in its portfolio are sold on the basis of a strategy – possibly long-term – coordinated with the Eurosystem. “

Clemens Fuest, director of the Ifo economic institute in Munich, said that the German court’s rejection of the ECJ’s earlier decision “reads like a declaration of war”.

The euro fell 0.7% against the dollar – its lowest level in a week – as investors contemplated the move, and German and Italian debt came under selling pressure.

“This is another obstacle to solidarity during the Covid crisis,” said Rabobank strategist Richard McGuire. “We knew there was a political barrier to cost sharing among eurozone members – now there is a legal one too. “

When the ECJ approved QE in 2018, it cited the limits the ECB had imposed on purchases of sovereign bonds to justify its decision. These limits include a commitment to buy sovereign bonds only in proportion to the economic size of each country – measured by its contribution to the capital of the central bank – and not to buy more than a third of the total eligible debt of a country. .

But when it launched PEPP, the ECB said it would waive the issuer limit and exercise flexibility on the capital rule and promised to consider further revising the limits if necessary.

The court did not rule on the PEPP, but the complainants should now consider whether to bring a new case.

“This is the big risk,” said Vítor Constâncio, former ECB vice president, on Twitter, saying that the court had made “a ridiculous distinction between monetary and economic policy.”

“New disputes will immediately come to Germany against the PEPP,” he warned.

ABN Amro analysts said: “Theoretically, the ECB [or] another national central bank could intervene to buy the target of German public sector assets or even equities, although this is complicated as there is no risk sharing in relation to purchases of government bonds . “

In a statement, the ECB said it “will analyze the decision and comment in due course”; its board of directors is expected to discuss the decision Tuesday evening. The Bundesbank declined to comment.

The complainants in this case are Bernd Lucke, professor of economics at the University of Hamburg and founding member of the anti-immigration party Alternative for Germany; Peter Gauweiler, former vice-president of Angela Merkel’s sister party, CSU; and Patrick Adenauer, grandson of the first German post-war chancellor.

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