EURO Sign in Frankfurt am Main. Image source: Denise Serra © 123RF.com
Yesterday the Second Senate of the Federal Constitutional Court in Germany ruled against the way the European Central Bank (ECB) conducted its asset-purchasing program, and more specifically its Public Sector Purchase Programme (PSPP).
The Court was deliberating on whether or not the asset-purchasing program administered by the Eurozone's central Bank was inlined with the guidelines delineated by German law concerning the principle of proportionality in relation to the purchasing of government debt.
According to the Constitutional Court's statement:
"[…] Court granted several constitutional complaints directed against the Public Sector Purchase Programme (PSPP) of the European Central Bank (ECB). The Court found that the Federal Government and the German Bundestag violated the complainants’ rights […] by failing to take steps challenging that the ECB, in its decisions on the adoption and implementation of the PSPP, neither assessed nor substantiated that the measures provided for in these decisions satisfy the principle of proportionality. "
It was explicitly stated that the ruling of the Court was aimed at the ECB's long-term practices relating to its asset-purchasing programs, but did not challenge the emergency relief package advanced by the Bank in the wake of the coronavirus fallout.
The Federal Constitutional Court's ruling underpinned previous concerns regarding the potential overstepping of constitutional boundaries in relation to the scope of the PSPP.
In challenging the legitimacy of the appropriated breadth and size of the ECB's PSPP program, the Court's decision indirectly highlighted a potential rift between the economies of the Eurozone.
Indebted economies in southern Europe like Italy and Spain rely heavily on the comprehensive asset-purchasing programs of the ECB to sustain a lifeline of vital liquidity.
In contrast, the more fiscal-responsible economies of northern Europe, chiefly those of Germany and the Netherlands, fear ballooning purchases of international debt, which could have a rippling effect for the entire Eurozone.
Following the release of the decision, the yield on German bonds rallied, whereas European stocks continued heading north, albeit at a slower pace.
EU Bonds vs Stocks Comparison Chart. Image source: Trendsharks ©, created with TradingView.com
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