FRANKFURT – Germany's highest court cast doubt on key eurozone stimulus efforts by giving the European Central Bank three months to prove that its key bond-buying program is justified and appropriate.
If it doesn't make that showing, the court ruled, Germany's own national central bank can no longer participate in the program - and would even have to sell bonds that it had purchased.
The euro fell after the decision by a half-cent to $1.0850. Analysts said the ruling could end up putting new constraints on central bank efforts to support the economy of the 19 countries that use the euro as they struggle to rebound from the shutdowns caused by the virus outbreak.
Doubts alone could complicate the ECB's efforts since it relies on markets believing that its measures will be effective. Bond purchases have been helping to keep the virus outbreak from rekindling market turmoil surrounding heavily indebted Italy, which has been hard-hit by the outbreak and is likely to see its debt levels rise as a result.
The judges of the Karlsruhe-based Federal Constitutional Court ruled that Germany's central bank, the Bundesbank, must stop buying bonds as part of an ECB stimulus program begun in 2015 unless the ECB reaches a “new decision” on the program that demonstrates its effects on the economy were “proportionate." It also said the Bundesbank should sell the bonds, but only in accord with the ECB and over the long term.
The Frankfurt-based ECB carries out bond purchases through national central banks. Several analysts have suggested that if the Bundesbank is barred from making purchases, they could be carried out by another of the 19 national central banks.
The ECB said it had “taken note” of the decision and underlined its determination to carry on with its stimulus efforts, saying it was “fully committed to doing everything necessary" to make sure its policies reached all parts of the euro area economy. It noted the European Court of Justice had ruled in 2018 that the ECB was acting within its powers.
The ECB has bought more than 2.6 trillion euros ($2.9 trillion) in corporate and government bonds in an attempt to raise inflation and weak economic growth in the 19 countries that use the euro. The program faced objections from conservative German academics that it exceeds the bank's authority and violates a legal ban against financing governments. The court found that the ECB did not violate that ban.
In its ruling, the German court broke with the European Court of Justice, which had approved the bond purchases. Such stimulus programs have become common among central banks and the U.S. Federal Reserve, the Bank of England and Bank of Japan have all resorted to similar purchases.
Carsten Brzeski, an economist at at ING Germany bank, said that “an optimistic interpretation could be this is lots of barking without biting and that everything is fine as long as the ECB demonstrates that it has thought through the economic consequences of its decisions."
A more pessimistic interpretation, he said, could be that no amount of additional ECB analysis will convince German judges and could, therefore, spell the end of the stimulus program.
The European Central Bank has more recently also announced 750 billion euros in new purchases to cushion the blow from the virus outbreak.
Tuesday's court decision did not apply to that new program, but analysts have been keeping an eye on the court case in case it calls into question the ECB's ability to intervene in markets to support the economy.
Andrew Kenningham, chief Europe economist at Capital Economics, said the decision could lead to future challenges: "The German constitutional court ruling today will not bring the ECB’s asset purchase program to a sudden end. But it highlights that a successful legal challenge to its policies in the future could contribute to increased tensions in the bond markets and to a renewed risk of eurozone break-up.”
The Bundesbank's head, Jens Weidmann, said in a statement that he would support the bank's efforts to justify the purchases: “The governing council of the ECB now has a period of three months to present its deliberations regarding the proportionality of the program,” Weidmann said. "While respecting the independence of the ECB’s governing council, I will support efforts to meet this requirement.”