German court gives ECB an ultimatum to amend its bond-buying scheme

Germany’s Constitutional Court on Tuesday ruled that a part of the European Central Bank’s (ECB) quantitive easing program went against German law, as the German government did not get to approve the bond purchases.

The court in Karlsruhe upheld a complaint that the Public Sector Purchase Program (PSPP) part of the ECB’s asset-purchase program could influence governmental economic policy, whereas the central bank’s role should be just to set monetary policy.

The German government and parliament have “a duty to take active steps against the PSPP in its current form,” the court said in a statement.

The PSPP accounted for some €2.1tn ($2.3tn, £1.8tn) in purchases between 2015 and 2018.

The court then gave the ECB three months to take steps to amend the scheme, otherwise the German central bank, the Bundesbank, could be barred from participating in the PSPP programme.

“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 court said.

READ MORE: Coronavirus: US government to borrow record $3tn in three months to tackle crisis

“This criticism is likely to prompt enhanced scrutiny of current and future programs going forward, with all of the problems that might entail in terms of fast effective delivery of monetary policy,” said Michael Hewson, Chief Market Analyst at CMC Markets UK.

“While the time frame being allotted is a tight one for the ECB to ensure they are compliant, the bigger concern is the scope of the new Pandemic Emergency Program, which has a much wider remit than the one just ruled on by the court,” Hewson added.

“Our gut tells us that this will blow over, eventually, though we sympathise deeply with the ECB’s legal experts at this point in time,” Claus Vistesen, chief Eurozone economist at Pantheon Macroeconomics, said. “They’ll need to muster all their creativity to come up with a response to satisfy the German Constitutional Court, and they need to work fast.”

The court case, which began in 2015, was brought by a group of politicians and economists, including Bernd Lucke, the former leader of the far-right Alternative for Germany party.

READ MORE: Coronavirus: UK economic shock to be 'deeper than anything in living memory'

“The decision published today does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis,” the court said.