ECB's QE Questioned by German Judges Asking for EU Review

  • German Constitutional Court rules in suits over ECB policy
  • Judges send case to European Union highest court for ruling

Germany’s top judges have put the legality of the European Central Bank’s 2.3-trillion euro ($2.7 trillion) bond-buying program in doubt in a ruling that asks the European Court of Justice for guidance in cases targeting the policy.

The Federal Constitutional Court seeks an interim decision on whether the quantitative-easing policy falls within ECB’s mandate as defined in the treaties of the European Union. The German challenges will be stayed in the meantime, the Karlsruhe-based German top court said Tuesday in an emailed statement disclosing the ruling, dated July 18. The judges asked their EU counterparts to hear the case under a fast-track procedure.

“There are grave reasons to hold that the motions underlying the bond-buying program violate the ban on monetary financing of states and overstep the mandate of the European Central Bank and thus transgress the powers of the member states," the court said.

The ECB defended its program, saying it’s fully within its mandate. The ECJ will now have to assess the program while the asset purchase system remains operational in line with previous Governing Council statements, the ECB said in a statement on the ruling.

Previous Cases

The ruling echoes a move three years ago when the judges asked Luxembourg for guidance on a challenge to the ECB’s Outright Monetary Transactions program. The ECJ later cleared the program with minor strings attached and the German tribunal reluctantly followed that direction in its final judgment. Most of the plaintiffs in the QE cases were in the group that sued against the OMT.

In the QE decision, the German court argued the current assets purchases wouldn’t pass the test under the ECJ’s OMT ruling. The ECB announced purchases in a way that suggested to markets that government bonds definitely would be bought, it said.

The judges also listed other elements that indicate a treaty violation, including that there was no way to verify there is a minimum period between the issuance of a bond and its acquisition. Other problems arise because the securities acquired so far have been held until maturity, and the ECB even bought bonds carrying a negative yield from the outset, according to the ruling.

The ECB started quantitative easing in March 2015 and currently intends to buy 60 billion euros a month of public and private debt until at least the end of this year, taking the size of the program to 2.3 trillion euros. Most economists expect purchases to be extended into 2018, though potentially at a slower pace, and eventually wound down.

Key Tools

The central bank has defended the program, alongside negative interest rates and free loans to banks, as a key tool for loosening financial conditions to revive euro-area inflation. But while the economy has now expanded for more than four years, spurring calls for QE to be tapered, consumer-price growth is still short of policy makers’ goal.

Germany’s finance ministry said it remains to be seen how the ECJ will answer the issue raised by the Constitutional tribunal.

The European Commission, EU’s executive arm in Brussels, said it’s convinced the ECB is acting within the limits of the treaties. The commission will intervene in support of the ECB in the proceedings before the Luxembourg-based ECJ, Annika Breidthardt, a spokeswoman for the EU agency, said.

The German judges are arguing that QE overextended the responsibilities of central bankers, who are improperly conducting economic policy instead of simply setting monetary policy. The national judges are also seeking guidance on how the ECB Governing Council can modify rules of risk sharing within the Eurosystem, warning that an unlimited risk distribution between the national central banks for bonds in default couldn’t be reconciled with German constitutional requirements.

The plaintiffs argue because the ECB is overstepping the powers granted to it under EU rules, any German participation violates the national constitution. One plaintiff has asked the court to issue an injunction stopping the Bundesbank from cooperating with the ECB on the program. Germany’s government must also take steps to stop it, including suing in the EU courts, they argue.

After the ECJ will have made its ruling, the cases will return to Germany for a final judgment.

The cases are: BVerfG, 2 BvR 859/15 et al.

— With assistance by Jonathan Stearns

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