German ruling casts doubt over ECB bond purchases

The European Central Bank's policy of mass bond-buying to stabilize the eurozone, known as quantitative easing, could have run into problems after Germany's top court ruled that it partly violates the German Constitution, as there is not enough political oversight of the process.

It is coincidental that the ruling has come now, during the novel coronavirus outbreak, which has sent economic shockwaves through the eurozone, as it in fact relates to earlier purchases by the bank, known as the ECB, of 2.1 trillion euros ($2.26 trillion) of government debt bought between 2015 and the end of 2019.

The crisis has left countries particularly reliant on the ECB's current round of bond purchases, but that process could now be in doubt after the court gave the ECB three months to provide further detailed justification of its previous actions, or potentially risk Germany's Bundesbank pulling out of it.

The action was first brought by some German academics in 2015.They said the purchases violated a European Union ban on one eurozone member subsidizing the debts of another.

In 2018, the European Court of Justice, or ECJ, ruled in favor of the ECB, but the case went back to German constitutional court, which this week decreed that the ECJ ruling was "untenable from a methodological perspective", raising questions about how EU law is applied across the bloc, a move that will be watched carefully.

"What was different with Germany was that it always made clear the (constitutional) court was prepared to step in and do something about it," Panos Koutrakos, professor of European law at London's City University, told the Financial Times. "This is the first case where a German court says the European court has no jurisdiction."

Legal complexities

A statement issued by the ECB said it "took notice" of the German court's ruling, but said its governing council "remains fully committed to doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim, and that the monetary policy action taken in pursuit of the objective of maintaining price stability is transmitted to all parts of the economy and to all jurisdictions of the euro area".

The court insisted its ruling was not in any way a judgment on actions being taken in the current situation, but the implications are clear, with Richard McGuire, a strategist from Rabobank, calling it "another barrier to solidarity during the COVID-19 crisis", adding legal complexities to existing political ones.

Former ECB president Vitor Constancio tweeted that the court had drawn a "ridiculous distinction between monetary policy and economic policy", and warned of more legal challenges within Germany to the ECB's current 750 billion euro pandemic emergency purchase program.