KARLSRUHE/FRANKFURT (Reuters) – Germany’s highest court on Tuesday gave the European Central Bank three months to justify bond purchases under its flagship stimulus programme or lose the Bundesbank as a participant, raising questions about the scheme and the euro’s future.
The verdict dealt a blow to the unprecedented 2-trillion-euro purchase scheme that kept the euro zone in one piece after its debt crisis but which critics argue has flooded markets with cheap money and encouraged over-spending by some governments.
Excluding the Bundesbank, the ECB’s biggest shareholder and bond buyer, would jeopardise the viability of the Public Sector Purchase Programme (PSPP) and put a question mark over Germany’s role in the euro.
But in a sign they were unlikely to be swayed, ECB policymakers meeting late on Wednesday reaffirmed their commitment “to doing everything necessary” to boost inflation in the euro zone and “reach all jurisdictions”.
The court judges left leeway for the Bundesbank continue in the scheme if the ECB could show that was necessary, despite “negative effects” such as risking taxpayer money and making governments reliant on central bank funding.
The ECB’s separate pandemic-fighting purchase scheme – a 750 billion euro ($815 billion) programme approved last month to prop up the coronavirus-stricken euro area economy – remained unaffected, as the Constitutional Court said its decision did not apply to that.
PSPP, meanwhile, currently accounts for less than a quarter of the ECB’s monthly bond purchases.
The court said the Bundesbank could no longer be part of it “unless the ECB Governing Council adopts a new decision that demonstrates … the PSPP (transactions) are not disproportionate to the economic and fiscal policy effects,” the judges said.
BUNDESBANK TOLD TO SELL BONDS
Bundesbank president Jens Weidmann said it would “support (the ECB’s) efforts to meet this requirement”.
The judges added the German central bank must also sell the bonds already bought, which were worth 533.9 billion euros at the end of April, albeit based “on a – possibly long-term – strategy coordinated with” the rest of the euro zone.
But they said the scheme did not amount to directly financing governments, which would put it in breach of EU Treaties.
The Karlsruhe ruling was final and the judges called on the German parliament and government to challenge the ECB on this subject, meaning the matter will now be settled between the EU central bank and Berlin.
While the court did not spell out the kind of proof it was demanding of the ECB, it referred to the effects of the bank’s policy “on virtually all citizens … as shareholders, tenants, real estate owners, savers or insurance policy holders”.
The ECB has credited its stimulus efforts, including the purchase of nearly 3 trillion euros of bonds since 2015, with creating 11 million jobs since 2013.
But critics, such as those who started the court case, have said it has helped to create bubbles in real estate and depressed returns on safe investments such as pension schemes, savings accounts and government bonds.
Commerzbank economist Joerg Kraemer expected the ECB to easily show the benefits of its purchases far outweighed the costs.
“The ECB’s bond purchases will continue,” he said. “Today’s ruling won’t change that.”
But Alexander Dobrindt, chief of the Bavarian conservative CSU group who supports Angela Merkel’s government in the German parliament, said the ruling still sent a “warning signal” to the central bank.
“The ECB should go back to its original mandate which is to secure the stability of the common currency,” Dobrint said.
And Henrik Enderlein, president of the Hertie School of Governance in Berlin, argued the verdict limited the ECB’s ability to do “whatever it takes” to keep the euro zone together, as promised by former President Mario Draghi.
The ruling also put the Constitutional Court in Karlsruhe at loggerheads with the European Court of Justice, the highest court in matters of European Union (EU) law. This had cleared the PSPP in 2018.
But the Karlsruhe judges decided they were not bound by the earlier ruling as the ECJ had failed to scrutinise the ECB’s actions to the point of making its own verdict “meaningless”.
“Tuesday’s ruling must be interpreted as a clear warning by the German court to EU constitutional order to stay within its own boundaries,” said Alberto Alemanno, a professor of EU law at the HEC business school in Paris.
And Luis Garicano, a Spanish liberal member of the European Parliament, said the decision posed a threat to the future of EU institutions
“Europe cannot work if national Constitutional Courts decide unilaterally… Expect Hungary´s and Poland´s constitutional court to follow this precedent,” he said in a Twitter posting.
The European Commission reaffirmed “the primacy of EU law” within the bloc.
(Additional Reporting by Balazs Koranyi in Frankfurt, Ursula Knapp in Karlsruhe, Michael Nienaber in Berlin and Karin Strohecker in London; Editing by John Stonestreet and Andrew Cawthorne)