(Bloomberg) -- European Central Bank policy makers will jump on a conference call Tuesday evening to plot how to respond to a surprisingly critical court ruling that cast doubt over their biggest crisis-fighting program.
Officials now have just three months to prove to Germany’s highest court that the asset-purchase program, which has bought 2.7 trillion euros ($2.9 trillion) of debt since 2015 and is adding more each month, is in line with European law.
Tuesday’s ruling won’t stop purchases immediately and it doesn’t affect a separate 750 billion-euro program launched in March to combat the coronavirus crisis. It does, however, raise question marks over just how far the ECB can push its monetary stimulus.
The decision is a “legal bombshell,” said Holger Schmieding, chief economist at Berenberg. “Whether the German constitutional court’s restrictions have an impact on market perceptions as to how effective the ECB can respond to the current economic emergency remains an open question.”
The initial response of investors was shock -- the euro slid and was down 0.7% at $1.0831 at 1:20 p.m. Frankfurt time. Bond yields fluctuated before rising in stressed economies such as Italy and Spain.
The lawsuit was filed by a group of businessmen and academics who are frequent critics of the EU, arguing that the ECB is improperly conducting economic policy instead of simply setting monetary policy. A key concern is whether sovereign bond purchases break EU law banning direct financing of government.
A complete victory could have ruled the Bundesbank out of the program -- a deathly blow as Germany is the euro zone’s biggest economy and its central bank accounts for the biggest share of purchases.
What Bloomberg Economists Say...
“Today’s German Constitutional Court ruling means the European Central Bank will justify its policy actions within three months, but in the meantime, at least, there is no material roadblock to asset purchases going ahead.”
-Jamie Rush. Click here to read the full INSIGHT.
In a complex decision, the judges ruled 7-1 that QE isn’t backed by European Union treaties, and said German authorities should have challenged it.
They said the ECB should have discussed a number of factors on how QE may have affected a wide swath of the economy, including shareholders, renters and insurance buyers.
They did offer a way out -- telling the Frankfurt-based central bank to come back within three months with a justification for its policy.
The ruling “only concerns the duty of the ECB to scrutinize its own action under a proportionality guideline and to document that,” said court president Andreas Vosskuhle. “The ECB isn’t per se blocked in any way.”
Yet that still raises the prospect of future challenges to a stimulus program that the ECB insists is a key part of its measures to revive the economy and restore inflation.
“For me this suggests it will never end and therefore we will constantly continue to face questions on how far the ECB can go,” said Lucas Guttenberg, deputy director at The Jacques Delors Centre in Berlin. “Politically it means we can’t rely on the ECB to save the day because we simply don’t know when the line will eventually be drawn.”
The decision also has wider implications for the European Union. In 2017, the judges asked the EU Court of Justice for an interim ruling aimed at limiting the ECB’s leeway, but the tribunal rejected the restrictive reading of the law suggested by their German counterparts.
“It’s an invitation for other countries to simply ignore decisions that they don’t like,” said Joachim Wieland, a law professor at the University of Administrative Sciences, who sees the real challenge in the future relationship between the EU Court of Justice and national courts.
Case number: BVerfG, 2 BvR 859/15 et al
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