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Top German court objects to ECB massive bond-buying programme

posted onMay 5, 2020

Germany's constitutional court on Tuesday (May 5), handed a three-month ultimatum to the European Central Bank (ECB) to justify its stimulus scheme.

The scheme was used between 2015 and 2018 to buy government bonds and other securities worth approximately €2.6 trillion with the aim of keeping the euro zone economy afloat. Over €2.1 trillion in purchases were made as part of the Public Sector Purchase Programme (PSPP). The programme also known as quantitative easing  (QE) was reactivated in November 2019.

The Karlsruhe-based court on Tuesday  ruled that the ECB stimulus programme partly contravenes German law, because neither the German government nor parliament signs off on the spending. 

The German top court also stated that Bundesbank, Germany's central bank, can no longer participate in the ECB's purchases of PSPP unless the ECB can prove the purchases are needed. 

The ECB stimulus scheme has previously been cleared by the Luxembourg-based Court of Justice of the European Union (ECJ), the highest EU court.

Tuesday's ruling by Germany's surpreme court did not cover  a  750-billion-euro stimulus package dubbed Pandemic Emergency Purchase Programme or PEPP which the ECB launched last month in response to the coronavirus crisis.

The Frankfurt-based institution plans to print another 1 trillion euros to  mitigate the economic consequences of the pandemicand help keep borrowing costs down for companies and governments. 

Commenting on the Karslruhe decision,  Carsten Brzeski, chief economist at ING Germany said in a note:

“It will take some time to fully understand the implications of the German Constitutional court’s ruling on the ECB’s quantitative easing program today ... But this could certainly become a real problem for the ECB in the recovery phase of the crisis.” 

Meanwhile, Commerzbank Chief Economist Jörg Krämer is certain that the bond buying scheme will continue.

"The ECB will have to prove now that the program is really proportionate so as to win approval by the German government and lawmakers — given the large group of experts at the ECB, that shouldn't be much of a problem." 

German Finance Minister ECB

(German Finance Minister Olaf Scholz Photo: Reuters)

German Finance Minister Olaf Scholz said that Bundesbank- ECB's largest shareholder, with a stake of more than 26 per cent- could take part in the programme for the time being.

"The ruling allows the ECB to make purchases in principle," Scholz said and announced that they will be making a decision on the stimulus programme in June. "We will find ways to make sure that what needs to be done in Europe gets done."

The court decision was being closely watched by the markets. After the announcement, the 
the euro dropped 0.7% against the U.S. Dollar and eurozone debt ratings fell too.

The European Commission reacted by stressing that the European Union law has primacy over national laws of member states.

Tuesday’s ruling raises questions about the future of the EU and the resilience of its institutions.

(With reporting by Reuters, DW, DPA)

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