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For months, news cycles have been dominated by COVID-related headlines. Which is why almost anything else offering some kind of distraction is heartily welcome – ideally not involving alligators or hyper-aggressive terrapins attacking bathers in lakes, which would be the normal summer fare in less crisis-ridden periods.
So the judgement on the ECB’s bond purchasing programme issued by Germany’s Federal Constitutional Court was exceptionally well-timed. Three months ago, WDR (the West German Broadcasting Corporation) started publishing headlines like “ECB bond purchases illegal: What happens now?” Interested readers were thrilled when two popular German dailies, Süddeutsche Zeitung and Die WELT, appeared to partially confirm the rumour. The Bank itself was even more specific: “ECB bond purchase programme partly unconstitutional”. Of course this made people even more curious – which is why we should take a closer look at the timeline and consequences.
The fact is that with every decision made under this programme, the ECB has helped to more or less flood the market with money – and is still doing so. As Commerzbank’s Chief Economist, Dr Krämer, explained back in March 2019 during Frankfurt School’s Financial Planner Days event, share-price and real estate-price movements are “liquidity-driven”. If liquid funds dry up, they are no longer available to drive positive trends.
Way back in 2012, at a press conference in London, when asked what the ECB would do to save the euro, the Bank’s then president Mario Draghi replied, “whatever it takes”. And in 2015, this is exactly what the ECB did by launching a Public Sector Purchase Programme (PSPP) that allowed banks (and governments) to raise money from the ECB more or less indefinitely. At the same time, the ECB imposed punitive interest on cash holdings, with the intention of pressurising investors to make the money available on the market in the form of loans or other liquidity-based instruments. And it is to these decisions and their consequences, dating from 2015, that the Federal Constitutional Court’s ruling of May 2020 refers. Indeed, the Court explicitly states that “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 Federal Constitutional Court briefly notes that the purpose of the PSPP was to support consumption and investment, as well as raise the rate of inflation to just under 2%.
It clearly and unequivocally states that the ECB Governing Council’s decisions regarding the PSPP were essentially ultra vires acts, meaning that it did not have the power to make such decisions. This places the Federal Constitutional Court in direct opposition to the Court of Justice of the European Union (CJEU), which, in 2018, ruled “that the PSPP neither exceeded the ECB’s mandate nor violated the prohibition of monetary financing.” The extent to which it is possible for Germany’s Federal Constitutional Court to oppose rulings by the CJEU is, of course, a whole new area of lively debate.
Above all, the Federal Constitutional Court believes that the CJEU’s ruling “is simply untenable from a methodological perspective given that it completely disregards the actual economic policy effects of the programme” and that “applied in this manner, the principle of proportionality… cannot fulfil its corrective function”. In short, the Constitutional Court believes that the CJEU failed to conduct a clear, unequivocal review of the programme’s advantages and disadvantages in a sufficient or adequate manner.
In words of one syllable, this means that the bond purchasing programme was a “rush job”, a bazooka that was loaded and fired too quickly without fully analysing the circumstances, considering the consequences, or setting up clear guidelines – meaning at the very least guidelines that establish clear limits and do not constitute a carte blanche. Finally, at the end of their judgement, the constitutional judges explicitly state that “German constitutional organs, administrative authorities and courts may participate neither in the development nor in the implementation, execution or operationalisation of ultra vires acts”. And continue as follows: “the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue”. This instruction is, however, linked to a negative condition – that this truly drastic prohibition will only take effect if the ECB’s Governing Council fails to demonstrate that the PSPP’s monetary policy objectives are “not disproportionate” to the programme’s impact on economic and fiscal policy.
The deadline for the three-month transitional period set by the Constitutional Court expired on August 5, 2020. Germany’s federal government, federal parliament and Bundesbank have all announced that they believe they have satisfied the Federal Constitutional Court’s requirements. However, it remains to be seen whether the Federal Constitutional Court will regard the documentation submitted by the ECB and federal government prior to the deadline as adequate and sufficient.
(All quotations relating to the judgement are taken from the English-language press release issued by the Federal Constitutional Court)
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