German court says some aspects of ECB bond buying programme are 'unconstitutional'

Germany's top Constitutional Court called into question the "proportionality" of the European Central Bank's main bond purchase programme, the so-called Public Sector Purchase Programme, but did not call into question the basic outline of the monetary authority's strategy.

According to Claus Vistesen at Pantheon Macroeconomics, the ECB's legal experts would now need "to muster all their creativity to come up with a response to satisfy the German Constitutional Court, and they need to work fast."

In its findings, released at 0925 GMT, the German tribunal said that the European Court of Justice's approach disregarded the "actual effects" of the PSPP and that by not carrying out the necessary overall assessment of whether the Eurosystem was staying within its monetary policy mandate, it had fallen short of its responsibilities.

The German jurists therefore called on the ECB to conduct that review and said the country's central bank, the Bundesbank, should ensure that the bonds held in its portfolio are sold as part of a "possibly long-term" strategy coordinated with the Eurosystem.

They gave the ECB three months to carry out the review in order for the Bundesbank to be able to continue participating in that bond buying programme.

The jurists did say that their ruling had no bearing on the ECB's Pandemic Emergency Purchase Programme.

Nonetheless, analysts in the City appeared to have doubts regarding the implications of the court's decision for the PEPP.

"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," said Michael Hewson, chief market analyst at CMC Markets UK.

But again, in overall terms, market commentary was that the decision did not call into question the ECB's basic strategy.

Along apparently similar lines, Vistesen added: "Our gut tells us that this will blow over, eventually, though we sympathise deeply with the ECB’s legal experts at this point in time."