Germany’s highest court has said the European Central Bank can continue buying bonds but must prove that purchases under its crisis-era programme are necessary within three months or Germany’s central bank must stop participating in the scheme.
However, the judges’ decision does not impinge on the ECB’s coronavirus bond-buying scheme, under which it has pledged to buy up €750bn (£650bn) of assets to boost the economy.
The German court ruling has been anxiously awaited in Europe. It is the result of a process kicked off in 2015 when a group of German academics brought a case against the ECB and its massive bond-buying programme, often called quantitative easing (QE).
The ECB has bought more than €2 trillion worth of government bonds – or debt – since launching QE to try to stabilise the Eurozone economy following the crisis of the early 2010s.
In Germany, which has a tradition of fiscal and monetary conservatism, the ECB’s actions have been deeply controversial.
The German academics argued in 2015 that QE was “monetary financing”, which is illegal under the EU’s rules. Monetary financing is when a central bank directly funds government spending.
Today, the German constitutional court said that it “did not find a violation of the prohibition of monetary financing of member state budgets”.
Yet it raised objections to the German Bundesbank’s participation in the bond-buying scheme, known as the public sector purchase programme (PSPP).
Ruling by seven to one, the judges said some parts of the QE programme are not in keeping with EU laws.
It said: “The Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB governing council adopts a new decision that demonstrates… the PSPP are not disproportionate to the economic and fiscal policy effects.”
The ruling comes as a blow to the ECB as it tries to fight the biggest economic collapse in Europe since World War II.
Investors sell bonds in wake of decision
Investors sold German bonds following the ruling, with 10-year yields rising 0.019 percentage points to minus 0.536 per cent. Yields move inversely to price.
Italian debt was sold more sharply, however, with 10-year yields climbing 0.078 percentage points to hit 1.832 per cent.
The court added that unless the ECB can prove its bond-buying programme is “proportionate”, the Bundesbank must sell the bonds it has bought through the programme.
Yet, with an eye on the coronavirus pandemic, it said this could be done as part of a “possibly long-term” strategy coordinated with the other Eurozone members.
The euro sold sharply in the wake of the decision, falling 0.6 per cent to $1.083.
Nomura analyst Jordan Rochester said this could be due to what the ruling might mean for the coronavirus bond-buying programme, which could face objections. “It will have set off a debate that most folks this morning were not expecting,” he said.