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Constitutional Court gives central bank three months to justify itself
Germany’s Constitutional Court has stunned European markets by calling into question the constitutionality of the €2trn (£1.7trn, $2.1trn) stimulus scheme launched by the European Central Bank (ECB) in response to the Covid-19 pandemic.
The Court ruled 7-to-1 that the ECB’s quantitative easing program is not backed by any European Union treaties and stated that the central bank should have considered the effect of the bond-buying and money printing scheme on renters, shareholders and insurance buyers.
The German federal government and Bundestag were also found to have violated a number of acts by failing to challenge the ECB and “neither assessed nor substantiated that the measures provided for in these decisions satisfy the principle of proportionality.”
Consequently, the eight judges bedecked in crimson and sometimes dubbed the Kardinals of Karlsruhe ruled that: “The Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates…the PSPP (Public Sector Purchase Programme) are not disproportionate to the economic and fiscal policy effects.”
That a court from the economic powerhouse of the euro zone and the keenest member of the European project has laid down such a challenge has taken many commentators and investors by surprise.
However, as per the Court’s findings, this challenge is motivated not by any eurosceptic undercurrents, but in fact the opposite. The judges observed that “the more its [PSPP] total volume increases, the greater the risk that the Eurosystem becomes dependent on Member State politics as it can no longer simply terminate and undo the programme without jeopardising the stability of the monetary union.”
Having experienced hyperinflation once before, Germany has been more wary of extravagant splurges than other European states. The Court highlighted the threat of “considerable losses for private savings” posed by the current stimulus scheme, and observed: “as the PSPP lowers general interest rates, it allows economically unviable companies to stay on the market.”
This problem has plagued the German economy since at least 2008. Earlier this year, a study estimated that between 15-17 per cent of German firms were already zombified and would not exist but for low interest rates, cheap credit and repeated government stimulus.
Only last week, ECB President Christine Lagarde reaffirmed her commitment to the current programs and hinted at further action to help the euro zone weather what she described as “a recession of unprecedented magnitude and speed in peacetime.”
The court has given the ECB three months to justify its policies.
For more news go to currrency.com
