Germany’s top court will rule Tuesday (5 May) on mass bond-buying by the European Central Bank, a tool the Frankfurt institution has deployed like never before to cushion the impact of the coronavirus.
“Will Germany’s supreme court constrain the European Central Bank’s response to the worst ever peacetime recession in Europe?” asked economist Holger Schmieding of Berenberg bank.
Judges are expected to issue their ruling at 0800 GMT in Karlsruhe, when Andreas Vosskuhle — president of the second senate of the Constitutional Court — reads the verdict.
At issue are so-called “quantitative easing” (QE) asset purchases, first launched in 2015 to support the eurozone economy and stoke inflation towards the ECB’s just-below-two-percent goal.
Reaching over €2.6 trillion before a pause through most of 2019, QE was reactivated late last year as trade wars, Brexit and other headwinds sapped the eurozone economy.
By March, an ECB confronted with the coronavirus crisis had upped planned purchases from €20 billion per month to over one trillion over the full year, including with a “Pandemic Emergency Purchase Programme” (PEPP) worth 750 billion alone.
That specific new tool is not targeted in the lawsuit to be decided Tuesday.
Among the plaintiffs in the case are economist and former head of far-right populist party AfD Bernd Lucke, as well as Peter Gauweiler, a former senior member of Bavaria’s conservative CSU party, and Patrick Adenauer, grandson of the founding post-World War II chancellor Konrad Adenauer.
They hope to establish that with QE, the ECB has violated a rule against so-called “monetary financing” of states laid down in European Union treaty, which largely limits the central bank to ensuring price stability.
Foreseeing this objection from the start, the ECB only buys government debt on the secondary market, rather than direct from national capitals.
But that may not be enough to convince the German judges, even after a 2018 ruling from the Court of Justice of the European Union (CJEU) that QE is legal.
It was the Karlsruhe court that asked the CJEU for its opinion, and the body could follow their European colleagues’ ruling.
“We do not expect the court to rule that the ECB’s ‘Public Sector Purchase Programme’ (PSPP) violates the German constitution,” Berenberg economist Schmieding said.
“Such a step could otherwise trigger serious turmoil in markets as well as an unprecedented clash between German and EU law.”
While the Constitutional Court cannot directly bind the ECB, it could forbid Germany’s powerful national central bank from taking part in PSPP asset purchases.
Risk to the eurozone?
Bereft of its weightiest buyer on the market, a quantitative easing so weakened by the judges would “surely bring the existence of the eurozone at risk,” warned Erik Nielsen, chief economist of UniCredit.
“Without doubt, the Constitutional Court knows this, and it’s not an outcome they would want to trigger,” Nielsen added.
But even without declaring the whole bond-buying scheme illegal, “the court could spell out conditions… that could make it more difficult for the bank to use this part of its monetary toolkit flexibly and efficiently,” said Schmieding.
New bounds on ECB intervention could be carried over to the new coronavirus crisis-fighting PEPP, which the central bank has declared not subject to limits like how much of any one eurozone nation’s debt it can buy.
Some hope comes from an earlier ruling by the Constitutional Court in favour of the financial crisis-era “OMT” scheme, which has never been used.
But if lead judge Vosskuhle hopes to go out with a bang before his last day in office on Wednesday, now could be his moment.