ECB secondary bond purchases are legal, European Court of Justice says

The European Union’s highest court ruled that the Eurosystem’s purchases of government bonds on secondary markets was legal, ending uncertainty over whether the programme breached the German constitution.

The European Court of Justice rejected the claims of a number of German pressure groups in a judgement published today (December 11). The pressure groups argued that the European Central Bank’s second public sector purchase programme, or PSPP2, contravened Germany’s constitutional prohibition of monetary financing. They also argued that the ECB was breaching the terms of its mandate to preserve price stability.

The activists, who included a number of German public figures from the country’s political right, brought a case before the Federal Constitutional Court. The German court said that it believed the PSPP2 programme might be a breach of the country’s constitution and referred the case to the ECJ in August 2017.

The ECJ’s ruling decisively rejects the case that the programme breached European or German constitutional law. It says the PSPP2 programme “falls within the area of monetary policy, in respect of which the EU has exclusive competence for the member states whose currency is the euro”.

It also says the programme is proportional to the aims that it seeks to achieve. The ECJ found that “the PSPP programme, in its underlying principle, does not manifestly go beyond what is necessary to raise inflation rates”.

The ECJ also rejected the plaintiffs’ argument that the programme could not be regarded as solely a matter of monetary policy.

Previous ECJ rulings had established “that a monetary policy measure cannot be treated as equivalent to an economic policy measure for the sole reason that it may have indirect effects that can also be sought in the context of economic policy”, the court ruled. It said that the Eurosystem “has to adopt measures that have certain effects on the real economy, which might also be sought, to different ends, in the context of economic policy”.

Preventing the Eurosystem from taking such steps “would, in practice, prevent it from using the means made available to it by the treaties for the purpose of achieving monetary policy objectives”, the court said. This might “represent an insurmountable obstacle to its accomplishing the task assigned to it by primary law”. This would be true particularly when there was “an economic crisis entailing a risk of deflation”.

Not monetary financing, court finds

The ECJ also found that the programme “does not infringe the prohibition of monetary financing”. A programme of bond purchases on secondary markets was “not equivalent to a purchase of bonds on the primary markets and does not reduce the impetus of the member states to follow a sound budgetary policy”.

The ECB adopted the PSPP2 programme on March 4, 2015, as part of the wider package of quantitative easing measures it has introduced under Mario Draghi’s leadership. Under PSPP2, the eurozone’s national central banks buy government bonds on secondary markets in a ratio determined by their share of the ECB’s capital key.

By May 2017, the national central banks of the eurozone had bought €1,534.8 billion worth of assets on secondary markets under PSPP2. The ECB initially said it envisaged the programme running until September 2016, but the ECJ noted that this end date “has subsequently been extended on a number of occasions”.

Several challenges

Groups of German citizens have made several legal challenges to the ECB’s quantitative easing programmes. The German constitutional court rejected a challenge to the ECB’s ability to use Outright Monetary Transactions in June 2016.

On that occasion, it ruled that the ECB had a right to undertake monetary policy operations. But the German court drew a distinction between monetary policy and economic policy, which it said the ECB did not have powers to carry out. The ECJ ruling today addressed that ruling when it stated that a monetary policy measure could not be classified as an economic policy measure just because the former would have some of the same effects as the latter.