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The German Constitutional Court has so far allowed the Bundesbank to participate in the ECB’s flexibilization program, but its legality must be verified within three months. The market was disappointed, waiting for a milder verdict.
Photo: Reuters – illustration for our image
The German central bank, the Bundesbank, should stop participating in the European Central Bank (ECB) bond purchase program unless the need is clearly demonstrated, the German Supreme Court ruled today. The court ruled on the ECB’s long-standing quantitative easing program, which has helped provide adequate liquidity to the European financial system in a number of crisis situations in recent years and has contributed to the recovery of the economy from the euro area.
The announcement of the decision immediately triggered a wave of sales on German government bonds and euro markets, and sellers also strengthened sellers on the region’s stock markets.
The lawsuit is not new, but it is decided at the wrong time
The case began three years ago, when the court opposed the Bundesbank’s participation in the PSPP program. The program launched in 2015 and currently covers about a quarter of the ECB’s bond purchases, recalls a Reuters summary. According to the judgment, the ECB must demonstrate that the size of the program is not disproportionate to its impact on economic and economic policy. Furthermore, according to the ruling, if this could not be proved, the Bundesbank would have to sell the bonds it had already bought under the program, although it would have to do so in agreement with the other members of the eurozone. Under the program, the German central bank bought € 533.9 billion in bonds in late April.
Since 2015, the ECB has bought bonds worth around € 3 trillion. For the European Central Bank, these purchases were one of the most important tools in the fight against deflation and in stimulating the economy. Until now, a significant part of these purchases has been made by the Bundesbank.
While the ruling at first glance may be quite troubling for the new ECB recently announced bond purchase program, it can still be considered favorable in one respect. According to the court, the bond purchase plans would not constitute direct financing from the Member States, as this is expressly prohibited by the Treaty governing the ECB. In Germany, a group of eminent academics have tried for some time to prove that the scope of the ECB’s asset purchases is disproportionate in relation to its favorable economic and financial effects, and that it is in fact illegal monetary financing.
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