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ECB’s QE Plan Faces German Ruling as Focus Is on Virus Fight

The judges will decide on Tuesday if Germany can continue to participate in the ECB’s Public Sector Purchase Program.

ECB’s QE Plan Faces German Ruling as Focus Is on Virus Fight
The European Central Bank headquarters stands on the bank of the River Main in Frankfurt, Germany. (Photographer: Alex Kraus/Bloomberg)

(Bloomberg) -- As Europe tries to deal with a new crisis, Germany’s top court is about to rule on a key program that helped it get out of the last one.

The judges will decide on Tuesday whether Germany can continue to participate in the European Central Bank’s Public Sector Purchase Program. Under the program, dubbed quantitative easing, or QE, the central bank buys bonds of euro zone governments.

The case, pending for almost half decade, relates to a program that was designed to spur liquidity in the banking sector amid a slumping euro-area economy and interest rates close to zero. The outbreak of the coronavirus earlier this year gives the case more drama since the ECB set up a much bigger program to head off the latest crisis.

The case, filed by a group of conservative businessmen and academics who have challenged a series of European Union and ECB programs, goes to the heart of German uneasiness with European integration in general, the euro and the ECB.

They argue that the ECB is overstepping its authority with the QE program and removing the incentive for EU countries to pursue sound fiscal policy by creating an ever-expanding safety net.

This sort of argument has been used in countless challenges against European integration, including the Maastricht treaty, the euro, the Greek bailout, the debt-crisis instruments and finally the ECB’s Outright Monetary Transactions program, a debt-purchase plan that was never put in operation.

Palpable Nervousness

All of these cases were rejected even as the German judges often expressed concerns in long judgments and sometimes added additional conditions, like needing parliamentary approval for certain measures.

While there is some palpable nervousness, most people, including the plaintiffs, don’t expect it will be much different this time.

“I’m convinced they’ll rule in favor of the ECB,” Erik F. Nielsen, UniCredit SpA’s London-based chief economist, wrote in a note Sunday. “But if I were to be wrong, mayhem of a previously unseen scale will descend on Europe and the world.”

The worry is a negative ruling will cloud the ECB’s 750 billion-euro ($824 billion) Pandemic Emergency Purchase Program. The rescue fund was created in March and removes many limits that constrained the previous plans.

Tuesday’s ruling won’t formally cover PEPP, but the court’s reasoning could hold implications for it. Under the combined programs, the ECB will buy more than 1 trillion euros of debt through the end of this year.

“There’s a lot at stake, not only for the running bond purchase program and for the PEPP but above all for the authority of German constitutional justice,” said Markus Kerber, a lawyer for some of the plaintiffs.

QE itself has created a quandary for the German top court since the case was filed in 2015, right after the asset-purchase program started.

Two years later, the judges asked the European Court of Justice for an interim ruling aimed at limiting the ECB’s authority. But the EU tribunal rejected the restrictive reading of the law suggested by their German counterparts.

The case returned to the German judges for a hearing in July. Court President Andreas Vosskuhle said the tribunal still sympathized with the plaintiffs’ view that the ECB overstepped its powers, but there were high hurdles for the judges to intervene.

Under the German constitution, the court can only disregard an EU ruling if it’s arbitrary and gravely unreasonable, and not simply because it seems wrong.

Kerber said that if the German court accepts the findings of their EU colleagues, “it will be difficult for it to further claim to be the guardian of the constitution.”

Coronavirus

The final ruling will come as the coronavirus ravages Europe and the rest of the globe. The decision was initially scheduled to be released in March, but was delayed until this week when most of the continent went into lockdown.

The pandemic, however, likely came too late to have much of an impact on the court’s decision. The judges only schedule rulings in hotly debated cases after they have finalized the written judgment -- typically following months of closed-door deliberations and fights over the exact wording of sentences.

In the QE case, the court announced on Jan. 23 that it would deliver its ruling on March 24. The two months in between were most likely used to work on the English translation of the judgment, which will a least have a hundred pages.

Only on March 16, the first day the country closed down, did the judges change reschedule the ruling to May 6.

QE originally ran from early 2015 until the end of 2018, and was controversially resumed late last year. Total holdings were 2.7 trillion euros at the end of March, with at least another 300 billion euros scheduled for this year to help fight the recession sparked by the coronavirus.

What Bloomberg’s Economists Say

“Unless the German Constitutional Court rules against the European Central Bank’s asset purchase program, this year could end with close to 1 trillion euros being printed to finance income support in countries that can’t afford it. Once the crisis phase of the coronavirus pandemic passes, the consequences of fully-flexible asset purchases for policy and inflation could be big.”

-- Jamie Rush, chief European economist

Click here to read the full INSIGHT.

The German case is: BVerfG, 2 BvR 859/15 et al.

©2020 Bloomberg L.P.