Germany’s central bank is set to keep buying sovereign bonds from next month, defusing an explosive ruling by the country’s constitutional court that had threatened to destabilise the European Central Bank’s flagship asset-purchase scheme.
The Bundesbank is facing a deadline of August 5, when the constitutional court ruled it would have to stop buying bonds unless the country’s government and parliament showed they had fully scrutinised the economic and fiscal impact of the ECB’s asset purchases.
Two officials briefed on the matter told the Financial Times that the Bundesbank will later this month formally decide to take its lead from the finance minister and parliament in Berlin, which both declared last week that the ECB had satisfied the court’s requirements. The ECB and Bundesbank declined to comment.
The German central bank is still debating whether to announce its decision publicly or to allow the deadline simply to slide by, an indication of how the court ruling has placed it in an uncomfortable position of having to support a policy it has often opposed.
Jens Weidmann, president of the Bundesbank and member of the ECB governing council, has spent much of the past nine years resisting its increasingly unconventional policies, which have flooded the economy with cheap money.
Once dismissed by former ECB president Mario Draghi as “Nein zu allem” — “No to everything” — Mr Weidmann has repeatedly spoken out against the bond-buying scheme since it started in 2015, arguing it risked straying into monetary financing of governments, which is illegal under EU law.
While the constitutional court in Karlsruhe stopped short of ruling that the ECB had been illegally financing governments, it gave the German government and parliament three months to ensure that the ECB provided a “proportionality assessment” of its €2.2tn sovereign bond-buying scheme. Otherwise, it said, the Bundesbank would have to stop buying bonds on behalf of the ECB and draw up plans to sell the more than €500bn it owned.
Peter Huber, one of the judges who drafted the court’s ruling, told the Frankfurter Allgemeine Zeitung newspaper it would not sit again to determine whether its conditions had been satisfied and instead it would leave it to the Bundesbank to decide.
“The Bundesbank is bound by our decision, but it must determine on its own responsibility whether the ECB’s statement of reasons fulfils our requirements or not,” Mr Huber said. “The federal constitutional court is no longer involved.”
In the end, the Bundesbank played a vital role in helping to resolve the legal stand-off by acting as an intermediary between politicians in Berlin and the ECB, which refused to respond directly to national institutions out of concern over its independence.
As well as debating the “proportionality” of its bond-buying at its last monetary policy meeting a month ago, the ECB provided the Bundesbank with unpublished minutes of previous meetings where it analysed the pros and cons of its flagship policy.
Within days of the Bundesbank passing these documents on to politicians in Berlin, finance minister Olaf Scholz wrote a letter to the president of the German parliament, Wolfgang Schäuble, declaring that the ECB had fulfilled the requirements of the court.
This was followed a few days later by a motion from the German parliament declaring that “the ECB’s report on implementing its proportionality assessment is transparent and that it fulfils the stipulations of the constitutional court’s ruling of May 5”.
The motion was supported by most of Germany’s main political parties — only the leftwing Die Linke abstained and the rightwing Alternative for Germany (AfD) voted against it.
Since Germany took over the EU’s rotating six-month presidency at the start of this month, its government has been keen to clear up the impasse between the country’s highest court and the ECB, which had threatened to undermine a pillar of eurozone monetary policy.
The ECB is counting on bond purchases as one of its main tools for countering the economic fallout from the coronavirus pandemic. In March, it launched a new emergency scheme to buy an extra €750bn of assets, which it expanded last month to €1.35tn.
In response, the AfD has promised to bring a fresh legal challenge against the ECB, alleging it has crossed the line into financing governments because its new scheme has ditched some self-imposed limits that governed previous asset purchases.