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StockBeat: German Court Ruling Puts the ECB’s QE Program in Jeopardy

By Geoffrey Smith -- Germany’s top court has - indirectly - put a huge, filthy question mark over the program that Europe is counting on to cushion the economic blow from the Covid-19 pandemic.

The court ruled on Tuesday that the ECB's self-imposed limits to its Public Sector Purchase Program - that is, its purchases of government bonds – were crucial to ensuring that it stays within the legal bounds of the EU treaty.

While it didn’t mention the ECB’s latest 750 billion-euro Pandemic Emergency Purchase by name, the ruling implies heavily that it would consider the program as drafted unconstitutional, given that the ECB has abandoned self-imposed rules that limit how much of a single government’s debt it can buy. The PEP is the cornerstone of the ECB's crisis response so far. 

Europe's stock markets pared gains in the wake of the result. By 5:30 AM ET (0930 GMT), the Stoxx 600 was up 1.3% at 332.58, off nearly 1% from its earlier intraday high.

The rules referenced by the court are that the ECB purchase bonds in line with its “capital key”, something that reflects the economic weight of each member state, and that the ECB buy no more than 33% of any individual issuer’s debt. 

The Federal Constitutional Court’s overall ruling dismissed a suit from just under 2,000 German academics and others seeking to stop the ECB’s sovereign bond purchases outright. As such, the ruling was more bark than bite, ING economist Carsten Brzeski noted. However, the language of the ruling showed a high degree of sympathy to the plaintiffs’ arguments, many of which are challenged by mainstream economists.

It ruled, for example, that the ECB had failed to provide an adequate justification for taking the decision to buy sovereign bonds, and said the German government and parliament failed in their duty to challenge the decision. It also said that it would stop the Deutsche Bundesbank from participating in the PSPP if the ECB failed to provide a more thorough explanation of its reasoning.

The court also reserved some choice words for the EU’s top court, which it said had batted away its concerns without proper analysis in a 2018 ruling. It called that ruling “incomprehensible.”

To that extent, even though the German ruling falls short of a worst-case outcome for the euro zone as a whole, it seems destined to inflame the long-standing tension within Germany over the ECB’s policy, which is seen locally as favoring economically weaker states in the region’s southern rim.

Technically, the ruling only covers the quantitative easing program that existed before the Covid-19 pandemic erupted. This program, initially launched in 2015, was reactivated late last year as the euro zone economy slowed under the impact of the U.S.-China trade war and then expanded by 120 billion euros as an initial response to the pandemic this year.  

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