Germany’s constitutional court has threatened to block fresh purchases of German bonds through the European Central Bank’s flagship stimulus programme, potentially weakening the bloc’s monetary policy response to the coronavirus crisis.
The court on Tuesday ordered the German government and parliament to ensure the ECB carried out a “proportionality assessment” of its vast purchases of government debt to ensure their “economic and fiscal policy effects” did not outweigh its policy objectives, and threatened to block new bond-buying unless the ECB did so within three months.
In recent weeks the central bank has vastly expanded its quantitative easing programme of bond-buying to mitigate the economic consequences of coronavirus. It has bought more than €2.2tn of public sector debt since launching quantitative easing in 2014 in an attempt to halt a slide in inflation.
The bond-buying programme has long been controversial in Germany, where critics argue the central bank has exceeded its mandate by illegally financing governments and exposing taxpayers to potential losses.
Ruling in a long-running case about the legality of the bond-buying, the court in Karlsruhe said the German government and parliament had “a duty to take active steps against” QE “in its current form”.
The complainants — a group of about 1,750 people, led by German economists and law professors — first brought their case in 2015. They argued the ECB was straying into monetary financing of governments, which is illegal under the EU treaty.
The case was referred to the European Court of Justice, which ruled in favour of the ECB in 2018, but it went back to the German constitutional court, which on Tuesday rebuffed part of the ECJ’s earlier ruling, calling it “untenable from a methodological perspective”.
By setting aside the ECJ’s 2018 judgment, the Karlsruhe court raised serious questions about the even application of EU law across the bloc. German courts have over decades of jurisprudence qualified the supremacy of EU law; other national courts have also raised objections.
“What was different with Germany was that it always made clear the [constitutional] court was prepared to step in and do something about it,” said Panos Koutrakos, professor of European law at London’s City University. “This is the first case where a German court says the judgement of the European court has no jurisdiction.”
The court laid out a long list of reasons why the ECB may have exceeded its mandate, but said it could not decide if the ECB had broken EU law without more information on how the central bank balanced the economic and fiscal impact of its actions against its monetary policy aims.
“Unless the ECB provides documentation demonstrating that such balancing took place, and in what form, it is not possible to carry out an effective judicial review as to whether the ECB stayed within its mandate,” it said.
Clemens Fuest, head of the Ifo economic institute in Munich, said the German court’s dismissal of the earlier ECJ ruling “reads like a declaration of war”.
The euro fell 0.7 per cent against the dollar — its lowest level in a week — and the spread between 10-year Italian and German borrowing costs — a key measure of country risk in the eurozone — widened by 0.2 percentage points to 2.5 per cent.
The decision may open the door to legal challenges against the ECB’s new €750bn pandemic emergency purchase programme (PEPP). The court did not rule on PEPP but it said the earlier bond purchases were only acceptable because of a number of limits that had subsequently been eased under the new programme. The plaintiffs are expected to consider whether to bring a fresh case.
“This is the big risk,” Vítor Constâncio, former vice-president of the ECB, said on Twitter, saying the court had made a “ridiculous distinction between monetary policy and economic policy”.
“New court cases will come immediately in Germany against PEPP,” he warned.
Richard McGuire, strategist at Rabobank, said: “This is another barrier to solidarity during the Covid crisis.”
He added: “We knew there was a political hurdle to sharing the costs between eurozone members — now there’s a legal one too.”
Most observers had expected the court in Karlsruhe to grudgingly accept that the ECB’s purchases of government debt were legal, and the court said that it “did not find a violation of the prohibition of monetary financing of member state budgets”. It added: “The decision published today does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis.”
The ECB governing council met to discuss the ruling on Tuesday evening, and said afterwards it “remains fully committed to doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim and that the monetary policy action taken in pursuit of the objective of maintaining price stability is transmitted to all parts of the economy and to all jurisdictions of the euro area”.
Jens Weidmann, head of the Bundesbank, said the court ruling “highlights important features” of the ECB’s sovereign bond-buying — a reference to its self-imposed limits — that he said “ensure a sufficient safety margin to monetary financing of governments”.
Mr Weidmann, who has been one of the leading critics of the ECB’s QE programme on its governing council, said: “I have indicated the importance of this margin in the past.” But he added he would “support efforts” by the ECB to explain the “proportionality of the programme”.
Eric Mamer, spokesman for European Commission, said: “Notwithstanding the analysis of the detail of the German constitutional court’s decision today, we reaffirm the primacy of EU law and the fact that the rulings of the European Court of Justice are binding on all national courts.”
Olaf Scholz, Germany’s finance minister, said: “It appears that we must further deepen and intensify European co-operation, and today’s verdict strengthens us in our efforts to do this, because it concedes to the ECB the fundamental right to carry out such bond-buying programmes.”
Additional reporting by Mehreen Khan in Brussels and Guy Chazan in Berlin