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ECB’s Foes Focus on Next Target: The Virus Rescue Plan

ECB’s Foes Focus on Next Target: The Virus Rescue Plan

(Bloomberg) -- The men who successfully challenged the European Central Bank’s asset purchase program are readying for their next target: the bank’s response to the coronavirus.

The groups are looking to use similar arguments from Tuesday’s verdict by German judges that questioned the quantitative easing program against the new 750 billion-euro ($810 billion) Pandemic Emergency Purchase Program.

“The court has stopped short of qualifying QE as monetary financing and has stressed the program’s limits are the reason for that,” said Bernd Lucke, one of 18 Germans who brought the case. “The ECB must now also incorporate them into the PEPP. If not, you could definitely sue again.”

Germany’s constitutional court on Tuesday ruled that the ECB’s failure to comprehensively explain how it balanced the pros and cons before deciding to undertake the 2.7 trillion-euro QE violates EU law. It gave the ECB three months to fix this, or Germany’s central bank, the Bundesbank, can no longer participate in the operation.

The ECB’s new PEPP program wasn’t part of the case and isn’t formally covered by the ruling. Nevertheless, the German judges elaborated broadly over what the European Union’s treaties allow or ban in general in these kind of programs -- language that can be cited in any new suits.

ECB’s Foes Focus on Next Target: The Virus Rescue Plan

Lucke said that the ECB now must explain how it balanced the issues when it launched PEPP. He will wait until Aug. 5, the three-month deadline set by the court, to see whether ECB President Christine Lagarde releases the rationale behind the plan. She must also incorporate strict limits to the asset purchases under PEPP, he said.

“Otherwise we can go straight to the constitutional court and ask for an injunction,” Lucke said. Lucke was the among the founders of Germany’s AfD party, which opposes the euro. He left the party in 2015.

While the quantitative easing program has strict limits, such as how much of each nation’s debt it can buy, the PEPP project doesn’t have many of those restrictions. Bond traders said the PEPP wouldn’t pass the test the judges set up for QE.

“In their assessment, the 33% bond issue limit, capital key and minimum credit ratings are all important to avoid monetary financing,” said Patrick O’Donnell, a money manager at Aberdeen Standard Investments. “The problem is that these have all been relaxed for PEPP and the market is demanding a significant upscaling of it.”

How fast a case could proceed is another crucial question. Plaintiffs could ask for an injunction to stop the Bundesbank from participating while the case is pending, Lucke said. However, in the QE case, the court twice -- in 2017 and 2019 -- rejected a similar request.

A regular case is expected to take years and the German judges would again have to send it to the European Court of Justice for guidance as EU law is at its core. Any final ruling is thus likely to come only after the end of the coronavirus pandemic. The QE case took five years.

Peter Gauweiler, a former lawmaker who has sued over issues including the Lisbon treaty and the debt crisis’s bailout instruments, is certain that Tuesday’s ruling will also prompt reconsideration of the PEPP. He’s confident the top court’s order that the German authorities take action to make the ECB disclose how it balances the stakes in QE will force the issue.

“In order to avoid a certain defeat in court, government and parliament will for sure also include the PEPP in that endeavor to make the ECB scrutinize its own actions under the principle of proportionality,” said Gauweiler, a member of the CSU, which is part of Angela Merkel’s government.

©2020 Bloomberg L.P.