Germany's top judges throw legality of ECB policy into doubt
The European Central Bank (ECB) may be violating a ban on financing governments in its €2.3 trillion asset-purchase programme, Germany's constitutional court said on Tuesday. It has now asked Europe's highest court to make a ruling.
Though the court's comments represented a big legal challenge to the ECB's efforts to revive growth, the decision was generally seen as positive for the central bank since the European Court of Justice has backed one of its bond-buying schemes in the past.
But it may limit the Frankfurt-based bank's options when deciding whether, and how, to extend purchases into a fourth year.
Judges at the Karlsruhe-based court said bond buys under the quantitative easing (QE) scheme may go beyond the bank's mandate and inhibit eurozone members' activities.
"Significant reasons indicate that the ECB decisions governing the asset-purchase programme violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank, thus encroaching upon the competences of the Member States," the court said.
It said it would ask the Luxembourg-based European Court of Justice to review the programme.
The ECB acted swiftly to defend the scheme.
"The extended asset purchase programme is in our opinion fully within our mandate," it said in a statement. "That is ultimately for the European Court of Justice to assess."
It said the €60bn per month asset buys would continue as normal. The European court has already backed the ECB's more contentious, and still unused, emergency bond-purchase scheme known as outright monetary transactions, or OMT, with only relatively minor limitations.
"We think that the case against QE has virtually no chance of being upheld by the ECJ," Greg Fuzesi, an economist at JPMorgan, said.
The decision to pass the issue over to the ECJ means any final ruling will come either after or near the end of QE, which started in 2015 and is expected to be wound down next year.
But it might make it harder for the ECB to tweak the constraints it imposed on the scheme, such as one barring if from owning more than a third of any individual country's debt.
The ECB is close to hitting this so-called issuer limit in Germany and Portugal.
"After today's ... verdict, it is even more unlikely than ever that the ECB will again raise its issuer limit, which means that in 2018 it will be forced to start scaling down purchases," Michael Schubert, an analyst at Commerzbank, said.
The scheme has irked many in the eurozone's biggest economy, Germany, who fear they are bearing the risk for a stealth bailout of indebted governments in the south of the bloc.
Those making the challenge - academics and politicians - have argued that the scheme constitutes illegal monetary financing and say the Bundesbank, the biggest buyers of bonds in the programme, should therefore not participate. With an election next month, Germany's political establishment has been highly critical of the ECB, arguing that low interest rates punish thrifty Germans and bond buys reward irresponsible governments on the bloc's periphery.
The populist right-wing AfD party, a top critic of the ECB, said the court challenge is too timid and comes too late as the ECB has to be stopped immediately.
The bank has long argued that its self-imposed rules take into account the European Court's limitations and the scheme's aim was to fulfil its legal mandate of returning inflation to around 2pc. (Reuters)