Thread by @RafaelMentges

1/ Tuesday 6 May 10:00 the German constitutional court (#BVerfG) issues ruling on the #ECB’s quantitative easing, the Public Sector Purchase Programme (#PSPP). Here is a short thread on possible rulings and how likely they are:
bundesverfassungsgericht.de/SharedDocs/Ter…

2/ What is it about? First, there are doubts about the compatibility of the PSPP with the prohibition of monetary financing according to Art. 123(1) TFEU
eur-lex.europa.eu/LexUriServ/Lex…

3/ Second, the ECB might have overstepped its mandate. According to principle of conferral (Art. 5 of the Treaty on European Union – TEU, in conjunction with Arts. 119, 127 et seq. TFEU), the ECB shall act only within the limits of the competences ...
eur-lex.europa.eu/LexUriServ/Lex…

conferred upon it by the member states.

The ECB’s competence is monetary policy which is to be distinguished from economic policy according to Arts. 119, 127 et seq. TFEU. The claimants argue PSPP is of an economic policy nature and is not monetary policy anymore.

Third, PSPP is suspected to convey high risks combined with unlimited risk sharing. This would amount to a violation of the constitutional identity within the meaning of Art. 79(3) in German basic law if the German parliament would be required to approve recapitalisation of NCBs.

6/ In its referral to the Court of Justice of the European Union (#CJEU) the BVerfG seems to agree with the assessment of the claimants. Here is the press briefing:
bundesverfassungsgericht.de/SharedDocs/Pre…

7/What are the possible rulings? 11 Dec 18 , the CJEU already decided in favor of the ECB, that the PSPP as currently designed is legal. The BVerfG could follow the decision and the ECB could continue the purchases of sovereign bond on secondary markets.
curia.europa.eu/juris/document…

8/The BVerfG could also decide to follow through with the point of view outlined in the referral of 2017 and call the PSPP illegal. In this case the German government would need to work towards an ending of PSPP and the Bundesbank would be asked to stop participation immediately.

9/ The purchases under the PSPP are decentralized. The national central banks (NCBs) are supposed to buy their own government’s bonds. The Bundesbank is the largest NCB of the Eurosystem. The consequences of its withdrawal are unclear.
ecb.europa.eu/ecb/legal/pdf/…

10/ While the ECB could probably continue it’s purchases without the Bundesbank’s participation it will definitely raise doubts about the ECB’s ability to conduct monetary policy in a crisis.

https://twitter.com/MartinSelmayr/status/1256256854675664898

11/ It would at least create more uncertainty in an already difficult economic situation and would put the Bundesbank in an awkward situation as it is obliged to execute ECB decisions but can't defy the BVerfG.
See this thread by @GrundSebastian:

https://twitter.com/GrundSebastian/status/1256983815412748290

12/ @lucasguttenberg argues that the German constitutional court calling PSPP illegal would cause massive political problems. Furthermore, the Eurogroup would need to stand ready for bold fiscal measures. See this thread:

https://twitter.com/lucasguttenberg/status/1256539112200380416

13/ A possible compromise for the BVerfG not losing his face and still trying to influence the ECB’s decisions without causing major disruptions in financial markets would be to ask the ECB to clarify and institutionalize the decision making process and ...

improve on the documentation and explanation of unconventional monetary policy measures.

While the court does not have jurisdiction over the ECB, it can make participation of the Bundesbank depending on the ECB’s willingness to comply with its demands.

15/ What’s the most likely outcome? A majority of the judges seems to be rather sceptical about the legality of the PSPP. Among the President Vosskuhle and the reporting judge Peter M. Huber who is a strong supporter of clear division of competences.

16/ He is also the judge writing the verdict, which means he has the opportunity to impose his narrative on the draft.

The other judges can be split between hawks (who might see PSSP as rather illegal) and doves (who are still sceptical but would let the PSPP run its course).

17/ The hawks are 5 (including the president and the reporting judge) and the doves are only 3 (König, Maidowski, and Langenfeld). 5 judges are needed to take a decision.

18/ However, in such big decisions the judges at the constitutional court try to find rulings that allow for unanimity. If that is the case on Tuesday we will probably see some smaller demands made by the court.

19/ On the other side, the decision on OMT was not unanimous. And there have been other major cases without unanimity.

Furthermore, some people have pointed out, that Tuesday is the last day of President Vosskuhle at the court.

20/ Therefore, he might try to take a stand. Given his rather conservative views about monetary financing and the competences of the ECB this could become a problem for the ECB.

Nevertheless, the compromise scenario seems to be the most likely outcome (I hope). The court is unlikely to be reckless enough to cause major turmoil during times of crises. While this is not a legal argument, the court has shown it won’t ignore the situation. /end

Thanks to @GrundSebastian, @MarijnvdSluis, and Robert Klotz for helpful comments.