Germany’s constitutional court has ruled the European Central Bank’s vast purchases of public sector debt were legal, but called for it to review if they were “proportionate” in pursuit of its monetary policy objective.
The court ordered the German government and parliament to ensure that the ECB carried out a “proportionality assessment” of its government debt purchases to ensure that their “economic and fiscal policy effects” did not outweigh its monetary policy objectives.
While most observers had expected the court in Karlsruhe to grudgingly accept that the ECB’s purchases of government debt were legal, some still feared it could rule against them, which could have triggered a serious crisis in eurozone monetary policy.
The court said in a decision published on its website that it “did not find a violation of the prohibition of monetary financing of member state budgets”.
It added: “The decision published today does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis.”
However, it said that Germany’s central bank would no longer be allowed to participate in public sector bond purchases if the ECB had not shown that its policy was not disproportionate within a three-month transitional period.
It added: “On the same condition, the Bundesbank must ensure that the bonds already purchased and held in its portfolio are sold based on a — possibly long-term — strategy co-ordinated with the Eurosystem.”
The euro fell 0.6 per cent against the dollar as markets reviewed the court decision, while Italian and German government bonds came under selling pressure.
The ECB has bought more than €2.2tn of public sector debt since launching its quantitative easing programme in 2014 to try to halt a slide in inflation. This year it has vastly expanded its purchases to stop the coronavirus pandemic spiralling into a wider debt crisis.