Groundbreaking ruling: Constitutional judges set limits on ECB bond purchases

Groundbreaking ruling from Karlsruhe: The Federal Constitutional Court is recourse ingesular to the multibillion-dollar government bond purchases of the European Central Bank (ECB).

Following the decision announced on Tuesday, the Deutsche Bundesbank will only be allowed to participate in the purchase programme under certain conditions. For the first time, Germany’s highest court challenged a ruling by the EU’s highest court. The current emergency programmes of the ECB in the Corona crisis were explicitly excluded by the constitutional judges (Az. 2 BvR 859/15 and others).

In order to stimulate the economy and inflation, Europe’s currency watchdogs have been investing many billions of euros in the purchase of securities from governments and companies since March 2015. In the opinion of the constitutional judges, the central bank has thus exceeded its mandate for monetary policy.

In future, the Bundesbank may only participate if the Governing Council makes it clear that the monetary policy objectives pursued by the purchase programme are not disproportionate to the associated economic and fiscal impact. The Federal Government now has three months to persuade the ECB to review the objectionable purchase programme.

Taking note of the ruling and continuing to do “everything necessary within the mandate” to ensure price stability and the effectiveness of monetary policy throughout the euro area, the ECB said. Bundesbank President Jens Weidmann, who is also a member of the Governing Council, said: “The Governing Council now has three months to set out its balances on the proportionality of the programme. I will support the fulfilment of this requirement, in compliance with the independence of the Governing Council.”

In the words of Chancellor Angela Merkel (CDU), the Karlsruhe judges clearly point to the limits of the ECB. This is also institutionally important, because the court opposes the European Court of Justice (ECJ) to some extent, Merkel said at a meeting of the Union Group, as the German Press Agency learned from participants.

According to Finance Minister Olaf Scholz (SPD), the ruling does not call into question cohesion in the European Monetary Union. At the same time, he stressed: “For the time being, the Bundesbank may continue to participate in the joint purchase programme.”

The Federal Government wants to work with the ECB for a thorough examination of government bond purchases. “Of course we will work towards this, that is clear,” said Finance Secretary Jörg Kukies. “We also expect the ECB to do so.” The Governing Council wanted to assess the Karlsruhe ruling in a special session on Tuesday evening. There will be an opinion after that, a spokesman for the central bank in Frankfurt said.

In the Corona crisis, which is challenging European solidarity in an unprecedented way, the verdict “can be irritating at first sight,” said court president Andreas Voßkuhle. But: “In order to deal with the crisis and its consequences in a sustainable way, we need the law as a solid common foundation.” The Federal Constitutional Court also “does not give the ECB any possible action from the outset”.

Between March 2015 and the end of 2018, the central bank had invested about €2.6 trillion in government bonds and other securities – the vast majority of it through the PSPP (Public Sector Purchase Programme), to which the ruling refers. On 1 November 2019, the controversial purchases were reissued, initially in a comparatively small amount of 20 billion euros per month.

A lot of money comes into circulation through bond purchases, which usually fuels inflation. The ECB is aiming for a medium-term inflation rate of just below 2.0 percent. After all, stagnating or falling prices can entice consumers and businesses to postpone investment. This can slow down the economy. The Deutsche Bundesbank is the ECB’s largest shareholder, with just over 26 percent. Their purchase volume is correspondingly large.

In December 2018, the European Court of Justice (ECJ) gave its blessing to the PSPP in a fairly blanket manner. Massive concerns from Karlsruhe ignored the Luxembourg judges in their decision.

The German constitutional judges do not see themselves bound by this judgment. It is methodically indefensible and appears objectively arbitrary, Voßkuhle said. In its 135-page ruling, the Karlsruhe Senate concludes that the central bank appears to have exceeded its powers.

The programme has “significant economic impactons on almost all citizens affected as shareholders, tenants, property owners, savers and policyholders,” said Voßkuhle. Savings assets would be at significant risk of loss, and house prices rose disproportionately. In addition, the Eurosystem is dependent on the policies of the Member States.

The ECB should now give a comprehensible weight to these effects and relate them to its objectives and the expected benefits. An effective judicial review is not possible otherwise, the Karlsruhe judges ruled.

There was also the accusation that the central bank was helping euro-state states with the bond purchases, i.e. illegally financing the state. An obvious circumvention of the ban could not be established, Karlsruhe decided.

To cushion the economic consequences of the Corona crisis, the ECB has once again significantly expanded its bond purchases. These aid measures were not the subject of the decision, as Voßkuhle expressly stated at the outset.

The verdict was prompted by four constitutional complaints from 2015 and 2016. Former CSU deputy party leader Peter Gauweiler and ex-AfD politicians Bernd Lucke and Hans-Olaf Henkel, among others, had sued. Another group of plaintiffs was represented by the Berlin-based financial scientist Markus Kerber.

The plaintiffs welcomed the ruling. “I am very pleased that the Federal Constitutional Court has essentially proved us right in our lawsuits,” Lucke said. For the former CSU politician Gauweiler, the decision shows that resistance makes sense.

The European Commission, on the other hand, recalled the primacy of European law. The eCJ’s rulings are binding on all member states, said Commission spokesman Eric Mamer. The Commission respect the independence of the ECB in the implementation of monetary policy. The judgment must now be analysed in detail. The ECJ itself stated, when asked, that it did not comment on judgments of national courts.

Economists expect government bond purchases to continue. The Federal Constitutional Court maintains the pressure on European monetary policy without, however, “swinging the sharpest sword of the immediate prohibition of the Bundesbank’s participation,” commented Dekabank Chief Economist Ulrich Kater. It is true that the subsequent examination of the proportionality of the bond purchases is an affront to the ECB. But with its armada of economists and lawyers, the ECB can easily handle such an audit,” argued Commerzbank Chief Economist Jörg Krämer.