A ruling from the German constitutional court in Karlsruhe is not everyone’s idea of prime-time viewing – but it was where the eyes of a lot of financial market participants were directed today.
The court was being asked to rule on the legality of the European Central Bank’s €2.6trn (£2.2trn) worth of asset purchases since 2015.
The ruling was of interest because the lawyers and academics who brought the case were hoping that the purchases, of bonds issued by eurozone governments, could be ruled illegal.
And that in turn could potentially have hindered the ECB’s latest €750bn (£643bn) worth of asset purchases in response to the coronavirus crisis, announced in March, called the pandemic emergency purchase programme (PEPP).
This would have done immense damage to the ECB’s battle to prevent an economic catastrophe following lockdowns to reduce the spread of COVID-19.
The significance of the imminent ruling was highlighted on Thursday last week when Christine Lagarde, the ECB president, said no fewer than eight times in a press conference that the bank was acting “within its mandate” – language specifically targeted at those seeking to overturn its asset purchases.
In the event, the court did not press the nuclear button.
The judges said they had been unable to establish that the ECB had been directly financing some eurozone governments – something which is explicitly ruled out by EU rules – in buying up their debt.
They did, though, make life more difficult for the ECB.
ECB president Christine Lagarde has insisted the central bank is acting within its mandate
For the judges said they considered it “doubtful” that the ECB has the jurisdiction to buy large amounts of public debt.
They ruled that the ECB had three months to prove that the asset purchases were necessary and appropriate.
And, the judges added, Germany’s national bank, the Bundesbank, would have to stop participating in the purchases in the absence of such proof.
Opinions differ as to how seismic this ruling will be.
Holger Schmieding, chief economist at Berenberg bank, described the ruling as a “little big bang” that he did not think would “restrict the ECB too much”.
Joerg Kraemer, chief economist at Commerzbank, added: “With its armada of specialists, it will be easy for the ECB to [come up with this proof].
“The ECB’s bond purchases will continue. Today’s ruling won’t change that.”
Yet the ruling could have longer-term consequences.
At the heart of this case lies anxiety among many Germans about the country’s relationship with the EU – and with the eurozone and the European Central Bank in particular.
The eurozone sovereign debt crisis a decade ago highlighted Germany’s unhappiness at the prospect of having to bail out southern European countries, like Greece and Portugal, regarded as feckless by millions of ordinary Germans.
Those concerns are why the ECB is explicitly not allowed to bail out – by buying their bonds – eurozone governments that fail to live within their means.
There has also been fury among millions of German savers at how Mario Draghi, Ms Lagarde’s predecessor, slashed interest rates in the Eurozone to below zero.
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It prompted Bild, Germany’s best-selling newspaper, to mock up a front-page picture of Mr Draghi with a cape and fangs as it accused “Count Draghila” of “sucking our accounts dry”.
The unhappiness and anxiety has increased of late because, under PEPP, the ECB may do away with a self-imposed rule obliging it to buy assets in proportion to the amount of capital that each euro area member has contributed to the ECB and preventing it from buying more than a third of the sovereign bonds issued by a particular eurozone government.
This latter point is especially contentious in Germany because relaxing this rule would let the ECB target asset purchases in areas where there is most strain, for example, allowing it buy more Italian government bonds than it would previously have been allowed to.
And, to that end, today’s ruling may eventually prove more important than it first looked.
Because, in delivering today’s judgement, the Constitutional Court set aside a previous ruling by the European Court of Justice (ECJ) – effectively challenging the legal supremacy of the EU’s top court.
Joachim Wieland, professor of law at the University of Administrative Sciences in Speyer, Rhineland-Palatinate, said: “This is a declaration of war against the ECJ and it will have consequences.
“It’s an invitation for other countries to simply ignore decisions they don’t like.”
Those sentiments were echoed by Hans-Olaf Henkel, a former MEP and former head of the Federation of German Industries, Germany’s equivalent of the CBI in Britain.
He also called it a declaration of war – not only against the ECJ but also the ECB.
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Leading economists certainly believe the ruling – news of which sent the euro lower on the foreign exchange markets – will clip the ECB’s wings.
Sarah Hewin, chief Europe economist at Standard Chartered, said: “The good news is that the ruling does not seem to apply to the PEPP, but there is a bigger concern that it limits the ability of the ECB to ‘do whatever it takes’.”
Greg Fuzesi, European economist at JP Morgan, said: “We think that today’s ruling does constrain the ECB to some extent as its programmes must clearly and explicitly recognise (through a cost-benefit analysis) the institutional setting they operate in.”
And the European economics team at Bank of America Securities told clients: “The German court ruling is tricky.
“It doesn’t force the ECB to change course immediately, but undermines its credibility.
“The ECB cannot be the only game in town forever. Governments have to step up. The ruling clearly emphasises that.”
That is the ultimate importance of today’s ruling.
COVID-19 is again testing the cohesiveness of the eurozone and, indeed, the EU itself.
This ruling creates another such test.
If Britain were still in the EU, and a British court had challenged the ECJ’s legal supremacy like this, TV cameras would have filmed Nigel Farage opening a bottle of champagne on the court steps.