German court puts squeeze on ECB over bond buying spree

Germany’s top court on Tuesday demanded clarification of a key element of the European Central Bank’s support to the eurozone economy, but stopped short of overturning its 2.6-trillion-euro “quantitative easing” (QE) bond-buying scheme altogether.

Germany’s Bundesbank central bank will be barred from participating in QE in three months’ time unless the ECB “demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the ECB are not disproportionate,” the Constitutional Court (BVG) in Karlsruhe said in a landmark ruling.

The court also raised an unprecedented challenge to the Court of Justice of the European Union (CJEU), labelling its earlier ruling rubber-stamping the QE scheme “not comprehensible” and declaring it not legally binding.

But presiding judge Andreas Vosskuhle said the ECB’s new 750-billion-euro ($813 billion) “Pandemic Emergency Purchase Programme” (PEPP) launched to fight the impact of the coronavirus was not directly affected.

The ECB said that it is “analysing the ruling and will comment in due course”.

Given the three-month grace period, “an optimistic interpretation could be this is lots of barking without biting”, ING bank economist Carsten Brzeski commented.

Others noted the judgement could be a boost for nations like Hungary and Poland, whose reforms to the political and judicial systems have drawn allegations they are undermining democracy.

The Constitutional Court was “calling the authority of the CJEU into question precisely when autocratic governments try to defeat the primacy of EU law,” law professor Matthias Goldmann of Frankfurt’s Goethe University posted on Twitter.

“Notwithstanding the analysis of the details of the German constitutional court today, we reaffirm the primacy of EU law,” a spokesman for the European Commission said in Brussels.

– ‘Proportionality’ test -Tuesday’s ruling turned on the idea of whether the ECB’s bond-buying programme meets a test of “proportionality” to its central objective of price stability.

By buying up government bonds, QE is designed to drive private investors’ cash into riskier investments, stoking economic growth and in turn powering inflation towards the ECB’s goal of just below two percent.

But the policy also has distributional effects, the BVG noted, potentially impacting “public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies”.

The CJEU found that such supposed side effects were admissable in the pursuit of the ECB’s overarching objective, accepting the central bank’s judgement on what interventions are necessary in pursuit of its goal.

By contrast, the German judges argued that the European court’s ruling “allows asset purchases even in cases where the purported monetary policy objective is possibly only invoked to disguise what essentially constitutes an economic and fiscal policy agenda”, such as lowering borrowing costs for individual euro member states.

Such a legal interpretation would effectively transfer competences over economic and fiscal policy from the national to the European level, the judges added.

By ruling in favour of something not permitted without change to the EU’s founding treaty, the CJEU had made its judgement “ultra vires” or outside the law, they said.

– ‘Ridiculous’ -The BVG’s aim in its decision may be to hold the ECB “under constant threat”, reserving to itself discretion over a border between permissible “monetary” and forbidden “economic” policy that “can’t be defined,” tweeted Henrik Enderlein, director of the Delors Institute think-tank in Berlin.

Former ECB Vice-President Vitor Constancio was blunter, calling the distinction between monetary and economic policy “ridiculous”.

“What laws have to be changed to put an end to these lawyers’ monetary/economic nonsensical views?”, Constancio asked.

Many observers warned that the German court’s insistence on constraints to QE could hamper the ECB down the line.

So-called issuer limits and the capital key restrict how much debt from any one government the ECB can buy, and mean purchases must be in line with states’ share in the central bank’s capital.

Such restrictions threatened to put the brakes on the ECB’s support to the eurozone economy before the coronavirus struck, and were dropped in the design of the crisis-fighting PEPP scheme.

“The Bundesbank should be able to keep the German issuer share below 33 percent for the foreseeable future… but that is excluding PEPP holdings,” Pictet Wealth Management economist Frederik Ducrozet said.

With the coronavirus crisis likely to deepen, forcing the ECB to extend PEPP in size and duration, “this situation is hardly sustainable,” Ducrozet added.