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Germany’s top judges prepare to deliver verdict on ECB bond purchases

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Via Financial Times

Germany’s constitutional court will on Tuesday announce its verdict on whether the European Central Bank’s purchases of public sector debt have breached the country’s law.

While most observers expect the court in Karlsruhe to grudgingly accept that the ECB’s purchases of government debt are legal, the possibility that it could rule against them raises the slim chance that it may trigger a serious crisis in eurozone monetary policy.

The ECB has bought more than €2.2tn of public sector debt since launching its quantitative easing (QE) programme in 2014 to try and stop inflation falling below its target. However, the QE programme has always been controversial in Germany, where critics argue the central bank has exceeded its mandate by illegally financing governments and exposing taxpayers to potential losses.

What is the background to this case?

The complainants — a group of about 1,750 people, led by German economists and law professors — first brought their case in 2015. They argued that by buying bonds of eurozone governments in the secondary debt market, the ECB was straying into monetary financing of governments, which is illegal under the EU treaty.

In July 2017 the court said it was “doubtful whether [QE] was compatible with the prohibition of monetary financing” and referred the case to the European Court of Justice in Luxembourg. 

In December 2018, the ECJ found in favour of the ECB, saying that QE as currently designed was legal. The German constitutional court was due to deliver its final verdict in March, but this was delayed until Tuesday because of the coronavirus pandemic.

Last year, the German court’s president Andreas Vosskuhle said it could only disregard an EU ruling if it was “arbitrary and gravely unreasonable” — which ABN Amro analysts said “looks like a high bar”. But Mr Vosskuhle steps down on Wednesday, making some wonder if he wants to go out with a bang.

What happens if the court rules against the ECB?

The ECB is expected to continue taking its lead from the ECJ ruling that QE is legal and can continue. But the way QE works in the eurozone is that each country’s sovereign bonds are bought by its own national central bank with funding from the ECB. 

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Germany’s Bundesbank is expected to follow the ruling of its own constitutional court, meaning the central bank of the biggest eurozone economy would no longer be able to buy its bonds. One practical solution would be for the ECB or another national central bank to buy German sovereign bonds instead.

But as Frederik Ducrozet, strategist at Pictet Wealth Management, says, such a move “would be a bombshell calling into question the singleness of monetary policy and the viability of the monetary union”. In this scenario, he predicted that the German government would step in with a legal “clarification” to allow the Bundesbank to keep buying Bunds.

Could this affect the ECB’s response to coronavirus?

The ECB vastly expanded its asset purchases in response to the coronavirus crisis in March by announcing a €750bn pandemic emergency purchase programme (PEPP) to buy various assets including sovereign bonds until at least the end of the year. 

The German constitutional court is not ruling on the PEPP. But if it rules against the ECB’s earlier public sector purchases, investors may fear that the PEPP could ultimately be at risk too, risking a sell-off in the debt of weaker economies like Italy. 

Is this the end of the battle?

When the ECJ approved the QE programme in 2018, it cited the ECB’s self-imposed limits on sovereign bond purchases in justifying its decision. These limits include a commitment to buy sovereign bonds only in proportion to each country’s economic size — as measured by its contribution to the central bank’s capital — and not to buy more than a third of any country’s total eligible debt.

When it launched the PEPP, the ECB said it would waive the issuer limit and exercise flexibility on the capital key. It also promised to consider further revising the limits if needed. ECB president Christine Lagarde trumpeted its “no limits” policy. 

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Whatever the German constitutional court decides on Tuesday, the complainants are expected to trawl through its ruling for ammunition to bring a fresh case against the ECB’s latest “no limits” asset purchases.; @MAmdorsky

Coronavirus reads

  • Ariana Grande has a solution to the Covid-19 crisis, writes John Authers (Bloomberg)

  • Jean Pisani-Ferry on why “the impediments to climate action will be even more formidable in the post-pandemic era than they were a few weeks ago”. (Project Syndicate)

  • Writing in the EPC, Johan Bjerkem thinks the EU should use the crisis to boost the “secret” weapon that has helped fight the pandemic: the single market

Chart du jour: Tale of two nations

Chart showing Portugal has seen far fewer excess deaths during its Covid outbreak than Spain, both in absolute and relative terms

Unlike neighbouring Spain, Portugal has emerged from its state of emergency this week with drastically lower death rates and higher testing ratios. The FT takes a look at how the centre-left government pulled it off.

Covid-19 news round-up


Supply scares
The coronavirus crisis has sharpened the need for Europe to bolster the resilience of critical industrial supplies ranging from pharmaceutical ingredients to raw materials used in advanced batteries, the EU’s internal market commissioner Thierry Breton has warned. The European Commission will warn in an upcoming report that the EU faces “major challenges” to secure supplies of critical raw materials including lithium, cobalt and rare earth metals used in high-tech industrial goods.

Donation drive
An EU-led global pledging event bringing together more than 40 governments (but not the US) has raised €7.4bn to fund a vaccine for Covid-19. The commission itself pledged €1.4bn to the effort in grants and loan guarantees. (FT)

Another Orban
The Guardian profiles Janez Janša, Slovenia’s rightwing prime minister, who has hit out at “lying” journalists and attacked the World Health Organization on social media:

“Critics fear Janša, like his mentor Viktor Orban, wants to use the coronavirus crisis for political advantage. He will also be able to act as an additional voice of support inside the EU for Orbán and the Polish government, who want to ensure the union does not lecture member states on democracy and rule of law. Slovenia will hold the rotating EU presidency next year.”

New cars please
Europe’s automotive sector wants governments to launch large scale scrappage schemes to supercharge demand for new cars and help out the flagging industry. Four car sector organisations will on Tuesday set out a 25-point plan which includes a call for “vehicle renewal incentives” that they say “should take into account society’s climate ambitions and resource-efficiency objectives in concert with the economic impact”.

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Quarantine binge-watch
The Guardian reviews Parlement — a Franco-English comedy TV series that has been dubbed a “Thick of It” for the European Parliament. It launches on Belgian TV from next week and all 10 episodes are available on France Télévisions.

News in brief
Italy’s number of active Covid-19 cases has fallen below 100,000 as the country slowly begins to restart the economy. Finland has announced it will allow restaurants and libraries to open from June 1. The UK will launch its trace and track National Health Service app with a pilot beginning on the Isle of Wight off the south coast.

Elsewhere in Europe


Franco-Dutch alliance
France and the Netherlands have joined forces in an unlikely pairing to demand Brussels toughen up its trade enforcement so countries who flout climate norms get punished with higher tariffs. The FT has seen the two countries’ position paper:

“Paris and The Hague have drawn up proposals urging the EU to be prepared to impose higher tariffs against countries that flout sustainable development commitments. The two countries are also encouraging the European Commission to press ahead with plans for a “Carbon Border Adjustment Mechanism” — a levy on imports from non-EU countries based on their carbon footprint. ”

FT-Bruegel alliance
Join EU home affairs commissioner Ylva Johansson on Thursday from 12.00 (CET) for the latest FT-Bruegel livestream event. You can take part and send in your questions via using #EU2020.

Coming up on Tuesday
Germany’s constitutional court delivers its decision on ECB QE in Karlsruhe from 10.00 (CET).; @mehreenkhn

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