Germany’s top court on Tuesday ruled against the European Central Bank’s bond purchases and gave the bank three months to explain how the scheme can be justified. The German Constitutional Court in Karlsruhe said the ECB’s EUR 2.1 trillion worth government debt purchases since 2015, were in violation of its mandate and did not take into account the economic and social after-effects.
The court asked ECB to explain why this quantitative easing measure was necessary, and also to check if it was proportional.
The euro area central bank bought these bonds under its Public Sector Purchase Programme, or PSPP, that ran from 2015-2018. The PSPP was restarted in November 2019.
The main issue that the complainants, whom include German economists and law professors, raised was that the ECB was undertaking monetary financing of governments by purchasing public sector debt.
The European Court of Justice had ruled in favor of the ECB in 2018 after the German court requested it to give an opinion on the stimulus measure. The court pointed out that there was not enough German oversight on the purchases and asked the Bundesbank to withdraw from the PSPP if the ECB fails to provide a satisfactory explanation in three months.
Germany’s Bundesbank is the major participant in the ECB scheme. The PSPP is touted as a successful ECB stimulus measure that helped support the Eurozone economy amid the 2010 crisis. Meanwhile, the latest German court ruling does not cover the Pandemic Emergency Purchase Programme, or PEPP, worth EUR 750 billion that the ECB announced in March to support the euro area economy amid the social and economic lockdowns triggered by the coronavirus or Covid-19 outbreak globally.
That said, if the ECB fails to give a satisfactory response in three months that could endanger its existing bond purchase programmes in future and severely limit its ability to use non-conventional policy tools in the face of an economic crisis. Economists have chosen to wait for the ECB’s reaction to the ruling before reaching a conclusion. “Today’s decision could become a real problem for the ECB in the next phase of the crisis when the recovery starts,” ING economist Carsten Brzeski said. “Then, a reshuffling between PEPP and PSPP could take place to shift from fire extinguishing mode to a growth supportive model. This shift has now been complicated.”