Court Likely to Set Tighter Limits for ECB’s Bond-Purchasing Programme

Tomorrow marks the beginning of the Federal Constitutional Court’s two-day hearing on the Public Sector Purchase Programme (PSPP) of the European Central Bank (ECB). The Karlsruhe-based court had already dealt with constitutional complaints against the programme in 2017, referring several questions to the European Court of Justice (ECJ) for a preliminary ruling. After the ECJ decided these issues in favour of the ECB in its December 2018 ruling, the Federal Constitutional Court is now continuing its proceedings. Professor Friedrich Heinemann, head of the ZEW Research Department “Corporate Taxation and Public Finance” at the ZEW – Leibniz Centre for European Economic Research, comments on this matter.

“The proceedings in Karlsruhe concerning the ECB’s bond purchases are likely to hold some surprises, or maybe even cause a stir. In its order for reference in July 2017, the Court expressed an extremely critical view of the design of the purchase programme and its justification by the ECB. In particular, the German judges see considerable risks of the central bank violating rules against monetary financing, thereby overstepping its monetary policy mandate.

Compared to the Federal Constitutional Court’s order for reference, the ECJ judges provided largely superficial arguments in their rule in favour of the ECB and accepted the ECB’s view surprisingly uncritically. In contrast, it can be expected that the hearing in Karlsruhe will go much more into detail and that more objections will be raised. The Federal Constitutional Court is likely to set tighter limits on the purchase of bonds, which at least the German Bundesbank will have to adhere to in its participation in the programme.

Thus, it is possible that some of the ideas prevailing in the ECB tower regarding the new edition and expansion of its bond-purchasing programme will have to be revised as soon as the Karlsruhe ruling has been issued. Once again, the verdict of the Federal Constitutional Court will attract considerable attention on the international bond markets.“