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The German Constitutional Court considers that some points of the European Central Bank’s asset purchase program violate the treaties of the European Union.
Karlsruhe-based court judges have now asked the institution led by Christine Lagarde to change its package within three months, in particular to justify the arguments of the asset purchase program, raising serious constitutional concerns in Germany.
The German court has doubts about the proportionality of the ECB’s asset purchase program, which was created during Mario Draghi’s tenure, and has asked the German government and parliament to ensure that the central bank does not go beyond the measures of monetary politics.
In light of today’s German Constitutional Court decision, the Bundesbank will be banned from participating in the crisis program against the purchase of debt, which has become more widespread due to the covid-19 pandemic, if “the Governing Council” it cannot demonstrate “comprehensively and substantially” “that it did not exceed European treaties,” decided the German supreme jurisdiction.
In 2017, the German Constitutional Court already ruled that the ECB’s procurement program violated European treaties and referred the matter to the Court of Justice of the European Communities. The European court’s decision was favorable to the ECB, which continued to buy sovereign and corporate debt securities, to boost inflation and the euro zone economy.
With the covid-19 pandemic predicting a severe recession in the European economy, the ECB launched the ‘Pandemic Emergency Buying Program’ (PEPP), launched by Lagarde after the Asset purchase programs (APP), a € 750 billion package to combat the pandemic crisis.
According to Bloomberg, this decision of the German Constitutional Court (seven judges voted in favor and one against) does not directly question PEPP, but may threaten its legality.
The ECB implemented a quantitative easing (QE) program between 2015 and 2018 and reactivated the asset purchase program this year, expecting to spend € 300 billion this year. In addition, it created the PEPP to respond to the effects of the pandemic on the economy, with a firepower of 750 billion euros. At the end of March, the ECB already had assets worth € 2.7 billion under QE programs.
The reaction in the markets is easing, and European stock markets and banks continue to rise.
Several experts in Germany who filed the complaint with the Constitutional Court argue that the purchase of assets is illegal because it is a monetary financing of the Member States, since each of the central banks of the euro zone buys, with the support of the ECB, debt issued by the respective States.
This practice is prohibited in European treaties, but the ECB argues that euro zone central banks, by purchasing debt on the secondary market and not directly from member states, are not committing any illegality.
“I do not believe that the Federal Constitutional Court decides that the entire program is illegal monetary financing by the states,” the president of the Research Institute, Clemens Fuest, Economica (Ifo), told Lusa on Monday.
WHAT THE ECB DECIDES AT THE LAST MEETING
At the last monetary policy meeting, the European Central Bank Board kept the size of the asset purchase program specifically created to respond to the pandemic (PEPP) unchanged at € 750 billion. However, it did take steps to facilitate banks’ access to finance.
Lagarde announced more flexibility nlong-term refinancing operations III (TLTRO III), which reduce the applicable interest rate to -50 points, compared to the average verified in the main refinancing operations, during the same period. At the March meeting, this interest rate stood at -25 points.
In addition, for banks that reach the limit of loans that they can access, the applied rate also falls to -50 points below the average applied to the deposit facility.
Another support measure decided by the institution was the creation of a new series of long-term emergency refinancing operations. The objective here is to ensure that liquidity is available, it is a backup in the event that market access conditions begin to deteriorate. The program consists of seven operations, the first to be launched in May, maturing between July and September 2021. The interest rate will be 25 basis points below the average of the refinancing operations verified in the same period.
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