What’s Going On Here?

German courts ruled that the European Central Bank’s (ECB’s) economy-boosting quantitative easing program might be unconstitutional.

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. 

What Does This Mean?

• German courts don’t think the ECB’s fully considered the wider effects of QE on the economy and reckon its program mightn’t therefore be “proportionate” to its economies’ relative sizes.
• And that would be a breach of EU rules. The ECB’s now got three months to convince Germany that its bond-buying is justified.

Why Should I Care?

For markets: The short arm of the law.

• Faced with potential disruptions to eurozone support programs, investors shied away from the euro, whose value fell almost 1%
• It might’ve dropped even more if the ECB’s coronavirus-specific support had been included in the German ruling too.

The bigger picture: Lean on Germany, when the ECB’s not strong.

• 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.

Content source: Finimize. (2020) Courtroom Drama. Available at: https://www.finimize.com/wp/news/courtroom-drama/ [Accessed on May 6, 2020]