The Name’s Bond, Illegal Bond: Germany questions the legality of ECB’s bond-buying programme

June 12, 2020

2 min read

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What's going on here?

Germany’s constitutional court ruled that the European Central Bank (ECB)’s massive bond-buying scheme will be regarded as illegal, unless the ECB can justify the purchase.

What does this mean?

Since 2015, the ECB has bought €2.6trn worth of government bonds to tackle the lingering aftermath of the 2008 financial crisis on the Eurozone economy. The massive bond-buying programme, also known as the public-sector asset-purchase programme (PSPP), has been heavily criticised in Germany on the basis that the ECB exceeded its mandate by financing EU governments, which is illegal under the EU treaty. The group of plaintiffs – led by German lawyers and academics first brought the case to the German constitutional court in 2015. In response, the court ruled that the bond-buying programme would be illegal under German constitutional law unless the ECB can provide valid justification within 3 months.

What's the big picture effect?

The ECB’s bond-buying scheme is a form of quantitative easing. In simple terms, quantitative easing is a monetary policy which involves a central bank purchasing a large volume of government bonds from commercial banks in order to inject a determined amount of money into the economy, which can help to boost economic activity.

However, under EU law, the ECB is prohibited from financing governments. Whilst the judges in Germany’s constitutional court did not find that the ECB had directly conducted sovereign financing, they did prohibit Germany’s central bank from participating in future purchases unless it can prove that the purchases are necessary. The court set out numerous reasons to support a finding that the ECB had exceeded its mandate under the PSPP, but could not conclude if EU rules have been broken without further evidence proving that the ECB implemented its monetary policy in a proportionate and balanced fashion.

The crux of the ruling concerns how the ECB will be able to clarify and justify its bond-buying programme. Effectively, the ECB will have to address the proportionality test, taking into account various social, economic and political factors. It is difficult for it to satisfy all requirements imposed by the German court, as it will still buy assets and bonds in similar schemes, at least in the near future, to provide financial aid for its member states under the tough economic climate following the coronavirus crisis.

Another important part of the ruling is the statement that the Court of Justice of the EU had overstepped its competency by approving the PSPP back in 2015. This would set a precedent for other member states that are clashing with EU decisions: especially if the German constitutional court can decide if the ECJ are acting within or exceeding their mandates, and if it ultimately has the authority to defy their decisions.

Report written by Long Dinh

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