The German Constitutional Court is likely to side with the ECB, but what if…

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Today at 8:00 GMT, the German Constitutional Court will decide whether the ECB's bond buying program (PSPP) is legal under German law or not. In this analysis, I discuss the two main possible outcomes and their respective market impact.


We are learning a new German word today: Bundesverfassungsgericht. For the purpose of simplicity, I will use in this article the abbreviation BVerfG. As you all know, I am not a lawyer, but I tried to look into this issue that could have major implications for the euro area and the current ECB’s PEPP.

What is it all about?

The German Constitutional Court will announce this morning whether the ECB’s public sector purchase program (PSPP) – which buys government securities in the euro area and was launched in 2015 under Draghi’s presidency to support economic activity and stoke inflation – is legal under German law.

Baseline scenario: the BVerfG sides with the ECB

Most lawyers (I think it does not make much sense to refer to economists for this matter) consider it is highly likely the BVerfG will side with the ECB and will accept the European Court of Justice (ECJ) decision of December 2018 ruling that the ECB PSPP was legal (see here, The ECB’s PSPP programme for the purchase of government bonds on secondary markets does not infringe EU law). It would make sense as the ECJ’s decision should be binding for all member states. Given that little has changed since then and that risks associated to PSPP are limited and there is no mechanism of burden sharing – which could be one reason pushing the Court to rule against the PSPP – we basically expect that the BVerfG’s ruling will be a non-event with little market impact.

Downside scenario: the BVerfG imposes restrictions

Instead of ruling that the PSPP is illegal (a possibility which is only considered by a minority of experts), the BVerfG could rule it is legal but imposes restrictions on the Bundesbank participation. It could mean that the German central bank would not be able to purchase as much assets as normally possible within PSPP. It is a bit unclear what would happen next. Some experts, notably Martin Selmayr, former Secretary-General of the European Commission, consider that the purchases of German debt could be delegated to another national central bank under Art. 9.2 of the ECB Statute which states that: “The ECB shall ensure that the tasks conferred upon the ESCB under Article 105(2), (3) and (5) of this Treaty are implemented either by its own activities pursuant to this Statute or through the national central banks pursuant to Articles 12.1 and 14”.

There is less doubt on the immediate market reaction in case the BVerfG imposes restrictions. As this scenario has not been priced in in the market, it could seriously undermine the euro which is trading around 1.09 against the USD at the moment. Investors would not take long to extrapolate that new complaints could emerge regarding the ECB’s action that could ultimately constrain PEPP in the future.  In the long run, it could also seriously question the political role of Germany within the euro area, which already strongly opposes to debt mutualisation through coronabonds, and cause political destabilization in Germany. Whatever will be the ruling this morning, it is more than probable we will see more legal disputes in the future, especially concerning the current PEPP and the flexible manner in which purchases are done.

If you want to go into further legal details before the decision is released, I strongly advise you to read the great Twitter threads written by Lucas Guttenberg, deputy director at the Jacques Delors Institute, and Sebastian Grund, former lawyer at the ECB.

I will post my comment following the ruling on my Twitter account @Dembik_Chris.

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