German court hears case against ECB bond-buying

Germany’s constitutional court has embarked on a fresh hearing about the legality of the European Central Bank’s programme of asset purchases — just as the ECB gears up for an expansion of its economic stimulus measures.

After more than four years and with around €2.6tn-worth of bonds already bought, the quantitative easing programme remains controversial in northern eurozone states.

Nowhere more so than in Germany, where the Karlsruhe court’s hearing is part of a long-running case that centres on whether the purchases constitute so-called “monetary financing”,
which is prohibited under EU law.

The timing of the hearing is delicate. Last week ECB president Mario Draghi said that the bank’s officials would look at a range of stimulus options — including rate cuts, a commitment to keep policy exceptionally loose for years to come and another round of QE — to counter fears that the bank would persistently undershoot its inflation target of just under 2 per cent.

What is monetary financing?
Eurozone treaties prevent the ECB from financing member states’ governments by buying their debt, a tactic known as monetary financing. This rule aims to protect the central bank from political pressure and avoid stoking inflation.

QE involves the central banks of eurozone member states buying government bonds in massive quantities, financed by the ECB. The complainants in the case — a group of almost 2,000 people,
led by German economists and law professors — argue that it is therefore illegal.

They want the Bundesbank, which has been the biggest purchaser of bonds under QE, to stop participating in the ECB programme.

They first brought their case against the ECB after the eurozone’s central bank embarked on QE in 2015, attempting to get the German constitutional court to block it.

The ECB argues that QE does not constitute monetary financing because it is only buying the
bonds in secondary markets from other investors, rather than purchasing the debt directly from
governments.  And the ECB’s QE rules prevent it from holding more than a third of any member state’s outstanding debt.

What have the courts said?
The German courts have been busy for years with a series of court cases about the scope of the ECB’s mandate.

In 2016 the constitutional court ruled in the ECB’s favour in a separate case about its Outright Monetary Transactions programme, which was unveiled in 2012.