ECB versus GDD – who wins?

13 May 2020
European politics always dishes up curve balls and issues that traders need to pay attention to, some of which don’t impact until further down the line. One of these reared its head last week with the ruling by the German constitutional court (GCC) that throws doubt over the future ammunition of the ECB’s asset purchases. It also strikes at the heart of who sets the rules for the Eurozone.

To recap, the court ordered the German government and parliament to ensure that the ECB carries out a ‘proportionality assessment’ of its significant government bond purchases. It gave the ECB three months to explain this or risk losing the Bundesbank, one of the 19 national central banks that are members of the ECB, as a participant.

QE lifeline

Of course, in recent weeks the ECB’s bond-buying programme has kept the eurozone from disintegrating during the coronavirus pandemic with the central bank vastly expanding its balance sheet. It has bought more than €2.2 trillion of public sector debt since launching QE in 2014 which has long been controversial in Germany, where opponents argue the ECB has exceeded its mandate by illegally financing governments and exposing taxpayers to potential losses.

The German court also questioned the even application of EU law across the bloc, to which other national courts have also raised objections. By dismissing an earlier European Court of Justice ruling at the same time, the GCC has ratcheted up the pressure on why the ECB may have exceeded its mandate.

Battle of the ‘Courts’

At the end of last week, the EU Court of Justice took aim at the GCC’s ruling by declaring that the EU court ‘alone’ has the power to rule over matters such as the constitutionality of the purchase program. It announced that its supremacy should not be questioned as ‘national courts are required to ensure that EU law takes full effect’. With this singular response, the EU court is clearly giving its support to the ECB in this matter. The European Commission also reaffirmed the primacy of EU law and that any rulings of the European court were binding on all national courts.

Germany now has to tread a fine line between upholding its national court’s decision, while also adhering to the EU’s top court as the guardian of European treaties. Any messy outcome, such as the ECJ issuing legal action if the Bundesbank stops buying German bonds needs to be avoided at all costs, otherwise the whole edifice of the EU framework is in jeopardy. Let’s not forget when the ECB was created 22 year ago, the German government insisted that the independence of the new institution must be firmly enshrined in law. So, it seems somewhat ironic that it's Germany’s highest court that's now putting its independence to its most severe test.

Long-term effects

Some analysts are concerned that the ruling may constrain the ECB’s ability to provide more stimulus just as Europe confronts its deepest recession in decades. If legalities win the day, then for sure the situation may complicate matters. That said, the ECB could simply add more detailed proportionality analysis to its policy announcements and deal with the issue pragmatically.

On the flip side, the defiant stance taken by both ECJ and therefore also the ECB, has sent a tough message to not only the EU’s largest state but also to others who may have been defying the region’s top court. It may in some way even push the eurozone closer together, with hopes of further deepening of co-operation, though as we know, this is the Eurozone and steps forward are often at a glacial pace.

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