The Federal Constitutional Court (BVerfG) today handed down a landmark ruling for European monetary policy and the financial markets. It has partially upheld the complainants‘ appeal against the PSPP. The court primarily admonishes the lack of a review of the proportionality of the chosen means and thus also challenges the decision of the European Court of Justice, which had declared the PSPP admissible. In its reasoning, the BVerfG specifically states that the PSPP decisions of the ECB are to be qualified as „ultra vires measures“ despite the ECJ decision. This means that the ECB, as it proceeded, acted outside its competences. However, the Court of First Instance only partially agrees with the complainants, because it in turn denies the allegation of monetary public financing. What exactly follows from the judgment?
„The Federal Constitutional Court gives the ECB three months to justify the proportionality of the chosen means to the public in a comprehensible manner. If this justification is given and the Federal Government and the Bundestag accept it, the PSPP can be continued with the participation of the Bundesbank. If, on the other hand, the ECB does not provide sufficient justification, the Bundesbank is prohibited from further participation in the PSPP.
„However, due to the lack of legal competence, the ruling does not apply to the ECB and the PSPP in general. The Federal Constitutional Court cannot therefore stop the PSPP throughout Europe.
„The Federal Constitutional Court also instructs the Bundesbank to ensure that the bond holdings are reduced in the long term. The court thus states that the PSPP cannot be set up as a permanent solution.
„Today’s ruling does not apply to the new PEPP programme; the Federal Constitutional Court explicitly states this.
“ The EMU markets react rather moderately to today’s judgement. BTP Bund spreads widened by up to eight basis points, while Bund yields were only temporarily slightly higher.
„This may also be related to the fact that the market is aware that the BVerfG ruling does not mean the end of the ECB programmes. The ECB now has time to demonstrate the proportionality of the PSPP, and in fact it should be able to do so. But even if the Federal Government and the Bundestag decide for themselves that the proportionality is not given and thus the Bundesbank no longer participates in the PSPP, the ESCB and the ECB themselves could step in and take over the Bundesbank’s share of the purchase.
„In the long term, however, a „never-ending story“ could result from the judgment of the BVerfG. If the ECB makes assumptions for statements and expectations, as it does, less so in the legal field
but more in the economic field, the approach is, then a „proportionality report“ can always be publicly debated and legally attacked.