Today’s German court ruling seems to have prompted a modestly negative response from financial markets with the euro slightly weaker in the aftermath of the decision.
While the judges found in favour of the ECB, they did find some areas of concern saying that some ECB action was unconstitutional, and not backed by the EU treaties.
There appears to be a couple of areas of the ruling that would appear to invite further scrutiny, and which ECB policymakers, as well as politicians will need to address.
The first one is a criticism of the Bundestag and German government for not monitoring the decisions of the Eurosystem on the purchases of government bonds under the PSPP asset purchase program, and ensure that future purchases stay with the mandate of the program. This criticism is likely to prompt enhanced scrutiny of current and future programs going forward, with all of the problems that might entail in terms of fast effective delivery of monetary policy.
The judges also went further by saying that the European Central Bank had three months to adopt a new decision to ensure monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. If they are unable to do this then the Bundesbank will no longer be able to participate in the current program.
While the time frame being allotted is a tight one for the ECB to ensure they are compliant, the bigger concern is the scope of the new Pandemic Emergency Program, which has a much wider remit than the one just ruled on by the court.
If the court has seen fit to express its concerns about the original asset purchase program, and its legality when it comes to the EU treaties, then its more than likely that the new Pandemic Emergency program will face a similar legal challenge as well, given it has fewer restrictions on the amount of assets that it can buy.
This would mean that the new program is likely to face heavier scrutiny going forward which could hinder the effectiveness of its implementation, particularly in a Bundestag which has the eurosceptic AfD as the main opposition.
It’s all very well ECB President Christine Lagarde saying that the ECB is ready to increase the scope of its €750bn Pandemic Emergency Program but if it is prevented from doing so because of questions about the program’s legality then the consequences could be quite severe, particularly for the fiscally weaker European countries like Spain and Italy which could see its borrowing costs rise.