Germany’s Judges Declare War on the ECB
In a new ruling, Germany's highest court has threatened to throw a wrench into the European Central Bank's efforts to extend liquidity and other forms of assistance to distressed eurozone governments. Coming amid a deep economic crisis, the court's decision could force one or more countries to crash out of the monetary union.
NEW YORK – Germany’s Federal Constitutional Court has just set in motion a process that could culminate in the unraveling of the European Economic and Monetary Union. The court has ruled that, following a transitional period of no more than three months, the Bundesbank may no longer participate in the eurozone’s Public Sector Purchase Program (PSPP), unless the European Central Bank demonstrates that the policy’s objectives are “not disproportionate to the economic and fiscal policy effects resulting from [it].”
The court’s decision covers the period between the PSPP’s first asset purchases on March 9, 2015, and the reinvestments phase that began on January 1, 2019, thus effectively stopping the clock on November 8, 2019, when cumulative PSPP purchases amounted to nearly €2.1 trillion ($2.3 trillion). Primarily at issue is a ruling in December 2018 by the Court of Justice of the European Union (CJEU), which itself contained two key elements.
First, the CJEU ruled that the PSPP did not circumvent Article 123 of the Treaty on the Functioning of the European Union (TFEU), which prohibits the monetary financing of member states’ budgets. Second, it decided that the program also did not violate the “principle of proportionality,” under which “the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties.”