Written by: Christopher Attard. Christopher's background is in journalism and finance, having studied psychology at the University of Malta. He has worked in the bitcoin and cryptocurrency space for years and provides services for SMEs in the industry. Get in touch at [email protected]
A German court has ruled that the European Central Bank's (ECB) quantitative-easing program is not backed by European Union treaties and have issued a three-month ultimatum to rectify the controversial measure.
The ruling underlines mounting conflict between central bankers and German authorities who are at odds with the extent of the ECB’s powers to influence economic policy (on top of monetary policy), and highlight the grim truth that this financial chemistry set is not a stable compound.
In a 7-to-1 ruling, the judges said that the QE program is not constitutional, which is why German authorities acted without constitutional backing by not challenging the 2.7 trillion-euro ($2.95 trillion) plan.
Quantitative Easing is a weapon deployed by the ECB to attempt to attempt to mitigate against economic turmoil, and consists of an asset-purchase program ranging from bonds to other assets. Meddling with such affairs often wreaks unforeseen havoc in a long enough time frame. The ECB's controversial program has been a concern for the German court since 2015, when the case was filed. In 2017, the judges asked the EU Court of Justice for an interim ruling aimed at limiting the ECB's Leeway, but the EU tribunal rejected the restrictive reading of the law suggested by their German counterparts.
Carsten Brzeski, chief economist at ING Germany, said on Twitter:
In short: German Constitutional Court sees no breaching of the prohibition of monetary financing of governments but German government and parliament should have challenged ECB's decisions.— Carsten Brzeski (@carstenbrzeski) May 5, 2020
The lawsuit was set in motion by several businessmen, academics and other Eurosceptics who argue that the ECB is improperly conducting economic policy instead of simply setting monetary policy.
“I assume that the ECB will follow the guidance, albeit without much enthusiasm,” said Joachim Wieland, a law professor at the University of Administrative Sciences, who as per Bloomberg commentary, sees this as a direct challenge between the Eu Court of Justice and national constitutional courts.
This is a declaration of war on the ECJ, and it will have consequences. It’s an invitation for other countries to simply ignore decisions that they don’t like.
In response to the pandemic, the ECB has now initiated yet another stimulus pack in what could be termed the ‘money printing warp drive’ in a bid to stave off the immediate fallout of this enormous economic contraction.
On April 30th, ECB President Christine Lagarde said that continued and ambitious efforts are required to fight the crisis. For this to happen, Germany's participation is critical as the country's own Bundesbank is the biggest buyer of debt under the program. Should Germany opt-out this could signal a major turnaround in the Union’s long-term viability.
Originally, QE ran from early 2015 until the end of 2018, and was resumed against no small amount of opposition in the final weeks of Mario Draghi’s presidency - that divided the ECB’s Governing Council.
Total holdings were €2.7 trillion at the end of March, with at least another €300 billion allocated for this year to mitigate the recession sparked by the Coronavirus pandemic.. However, this wasn’t enough in light of the grim economic reality, which led ECB leader Christine Lagarde to propose a staggering €750 billion ‘Pandemic Emergency Purchase Program’ (PEPP) in March which would also all spending limits.
Under the combined programs, the ECB will follow its American counterparts at the Federal Reserve, printing more than €1 trillion of debt until the end of the year, as the Euro-Dollar fiat system proves to have no real value. Lagarde, who escaped a prison sentence despite a guilty verdict, said on April 30th that the central bank is “fully prepared” to increase or extend the PEPP if needed.
With no limits on supply, the only thing central bankers need to worry about is people wising up to the fact that their money is slowly becoming worthless. As this happens, bitcoin is set to undergo a major monetary change that will see its inflation mimic that of gold. The quantitative hardening, or halving event is less than four days away as bitcoin trades above $9,000 at the time of writing.