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Top German court: ECB bond buying scheme partially illegal

May 5, 2020

Germany's constitutional court has ruled that the European Central Bank's stimulus program partly contravenes German law, because neither the German government nor parliament signs off on the spending.

Deutschland Corona | Euro Symbol am Willy Brandt Platz Frankfurt
Image: Imago-Images/J. Huebner

Germany's Constitutional Court largely upheld several complaints against the European Central Bank's purchase of government bonds under a program started in 2015 and meant to boost the economy and stoke inflation toward the central bank's own target of just below 2%.

Tuesday's ruling by Germany's supreme court was the result of years of debate over the role of the eurozone's central bank. It did not cover current ECB aid issued in response to the coronavirus crisis, with the ECB having launched a special Pandemic Emergency Purchase Program.

The judges in Karlsruhe raised concerns back in 2017 that one specific part of the bond-buying program, the Public Sector Purchase Program (PSPP), could engage in economic policy and direct government financing, both of which the ECB is prohibited from doing.

The overall asset purchasing scheme was used between 2015 and 2018 to buy government bonds and other securities worth approximately €2.6 trillion ($2.9 trillion) with the aim of boosting the economy. Over €2.1 trillion in purchases were made as part of the PSPP. 

The program also knows as quantitative easing was reactivated in November of last year against the backdrop of trade conflicts, the specter of Brexit and other headwinds impacting the eurozone economy.

Government and lawmakers need to scrutinize ECB decisions

Germany's supreme court stated it could not find any proof of direct government financing by the ECB. But it found that both the German government and lawmakers had failed to scrutinize the objectives and mechanisms involved in the ECB's bond buying program. The judges said there had never been a thorough analysis of whether the ECB's PSPP scheme was really an adequate measure to boost the economies of the 19-member eurozone.

The court thus sided with several groups of plaintiffs including economist and former far-right AfD leader Bernd Lucke as well as Peter Gauweiler, a former senior member of Bavaria's conservative CSU party. They had argued that the central bank's bond buying program was not within its sole mandate of ensuring price stability.

Ping-ponging with EU court

It was some judges at the Federal Constitutional Court themselves who back in 2017 started the ball rolling by raising concerns that a specific part of the bond buying program, the Public Sector Purchase Program (PSPP), could directly engage in economic policy which the ECB is not allowed to do.

The European Court of Justice took up the case and ruled in December 2018 that the ECB's decision to buy sovereign bonds was valid and within the bank's mandate, despite the concerns voiced by some in Germany. However, concerns in Karlsruhe had remained all along.

Uwe Burkert, an economist with LBBW Bank, said after Tuesday's ruling by Germany's top court that "the verdict is a very explosive thing."

"The Bundesbank [Germany's central bank] will — after a transitional period of three months — be barred from taking part in the ECB's PSPP program."

Commerzbank Chief Economist Jörg Krämer is certain, though, that the bond buying scheme will continue. "The ECB will have to prove now that the program is really proportionate so as to win approval by the German government and lawmakers — given the large group of experts at the ECB, that shouldn't be much of a problem."

hg/msh (AFP, Reuters, dpa)