Is The ECB's Bond Buying Unconstitutional?

Is The ECB's Bond Buying Unconstitutional?

almost 4 years ago2 mins

You want the truth? Sure, you can probably handle the truth: German courts ruled on Tuesday that the European Central Bank’s (ECB’s) economy-boosting quantitative easing program might be unconstitutional 🇩🇪

What does this mean?

Quantitative easing (QE) is when a central bank buys government bonds from the market and, in doing so, puts cash to work doing all sorts of productive things for the economy. It’s something the ECB’s been doing on and off since 2015 – and as of last year, it’s been very much on.

Source: Bloomberg
Source: Bloomberg

German courts don’t think the ECB’s fully considered the wider effects of QE on the economy – namely on shareholders, renters, and insurance buyers – and reckon its program mightn’t therefore be “proportionate” to its economies’ relative sizes 👩‍⚖️ And that would be a breach of European Union rules. The ECB’s now got three months to convince Germany that its bond-buying is justified, as well as to win over the support of the eurozone’s largest economy.

Why should I care?

Faced with potential disruptions to eurozone support programs, investors shied away from the euro in favor of other currencies 💶 Its value fell almost 1% on Tuesday, and might’ve dropped even more if the ECB’s coronavirus-specific support had been included in the German ruling too.

Source: The Wall Street Journal
Source: The Wall Street Journal

When the ECB enacts QE, it does so with the help of individual eurozone countries’ central banks buying up bonds on its behalf. But if the German court isn’t happy with the ECB’s response and things escalate, the country’s own central bank might be forced to halt its support – which is the most substantial of any European country’s 💰 And if that happens, the ECB will likely struggle to buy as much as it was targeting, making the program even less effective than it’s already been.

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