ECB had breached EU treaty law in overstepping their mandate.
- Monday, May 11, 2020
Last Tuesday, the German Constitutional Court, ruled that the German government had failed to hold the European Central Bank (ECB) to account for some of its asset purchase programs, that are intended to support the EU’s economy across the void of coronavirus-related inactivity.
The Court ruled that the ECB had breached EU treaty law in overstepping their mandate in their bond purchasing programme. The ECB QE bond purchasing assets now sit at €2.2tn. The ruling suggests that the ECB bond purchases violate the EU ban on one eurozone member subsidising the debt of another. In order to get around this ruling the ECB have been buying sovereign debt in the secondary not primary (direct) market.
The ECB was given three months to provide explanations. The markets did not see the ruling as great for Europe but while it clearly raises some risks to the continuation of printing euros to fund asset purchases, the ECB should be able to satisfy the court’s conditions. Markets took the ruling in their stride as another EU fudge is expected.
The court did not say that the recent €750bn Pandemic Emergency Purchase Program (PEPP) was a problem, nor did it say the ECB had exceeded its remit, but reading between the lines, the European Monetary Union (EMU) would do better to address its structural weaknesses through a common mandate, rather than ‘muddling-through’ yet again. Some commentators are now expecting a treaty change to legalise the ECB actions but that will not be easy as this highlights the greater debate about the imbalance in eurozone sovereign debt.
The German Constitutional Court did however rule that some aspects of the ECB’s Public Sector Purchase Programme are unconstitutional given the ECB’s mandate and the EU treaties. The 7 to 1 ruling shows a mistrust by the German Constitutional Court over what they perceive as scope creep by the European Central Bank. Given Germany’s economic size within both the EU and the Eurozone, a failure for the Bundesbank to support future risk mutualisation would be a negative for European risk assets. The ruling may confirm to many German politicians that the ECB is already overstepping its mandate into a grey area and providing monetary support to member states. This will put pressure not only on future quantitative easing participation but also deliver political pressure to not support fiscal burden sharing. Whilst fiscal burden sharing is a separate topic to the ECB’s monetary activity, if there is a feeling the central bank has already allowed burden sharing via the back door fiscal support may look even less likely going forward.
The German Constitutional Court’s decision highlights the lack of unity in Europe over the need or legal ability to provide support for weaker member states. Whilst there is a monetary union within the Eurozone, a lack of fiscal union has proven problematic during the Eurozone debt crisis and more recently during the coronavirus pandemic. The German court ruling that aspects of the ECB’s quantitative easing is unlawful shows a lack of unified support for burden sharing even within the monetary union. A lack of economic coordination within the Eurozone has been a key driver of our heavy underweight to European equities and last week’s decision muddies the water further.
The German Constitutional Court has now marked the limit of ECB intervention and that going forward this may have consequences to the range and scope of financial support the ECB can offer. Therefore, national governments will now have to decide how to react to the ruling, particularly Angela Merkle. A crisis in confidence would occur if Germany refused to support the ECB as QE in Europe would stop without German backing.
Chris DaviesChartered Financial Adviser
Chris is a Chartered Independent Financial Adviser and leads the investment team.