Germany's top court on Tuesday gave the ECB three months to justify bond purchases under its flagship stimulus programme or lose the Bundesbank as a participant, raising questions about both the scheme and the euro's future.
The verdict dealt a blow to the unprecedented 2-trillion-euro purchase scheme that helped kickstart the euro zone economy after its financial and debt crises of a decade ago, but which critics argue has flooded markets with cheap money and encouraged over-spending by some governments.
It also put the Constitutional Court in Karlsruhe at loggerheads with the European Court of Justice, the highest court in matters of European Union law and which had cleared the Public Sector Purchase Programme (PSPP) in 2018.
As European bonds and the euro fell, the EU's executive commission reaffirmed "the primacy of EU law" within the bloc, and an ECB spokesman said the bank's governing council would hold an unscheduled meeting later in the day.
The Karlsruhe court judges left leeway for the Bundesbank - the biggest participant in PSPP - to continue in the scheme if the ECB could show was necessary, despite "negative effects" such as risking taxpayer money and making governments reliant on central bank funding.
German Finance Minister Olaf Scholz said the three months granted to the ECB to demonstrate the necessity of the scheme was "quite a long time period", and the Bundesbank could stay in it for the time being.
The ECB's separate pandemic-fighting purchase scheme - a 750 billion euro ($815 billion) programme approved last month to prop up the coronavirus-stricken euro area economy - remained unaffected, as the Constitutional Court said its decision did not apply to that.
PSPP, meanwhile, currently accounts for less than a quarter of the ECB's monthly bond purchases.
The court said the Bundesbank could no longer be part of it "unless the ECB Governing Council adopts a new decision that demonstrates...the PSPP (transactions) are not disproportionate to the economic and fiscal policy effects," the judges said.
The judges added the German central bank must also sell the bonds already bought, which were worth 533.9 billion euros at the end of April, albeit based "on a - possibly long-term - strategy coordinated with" the rest of the euro zone.
But they said the scheme did not amount to directly financing governments, which would put it in breach of European Union Treaties.
While the court did not spell out the kind of proof it was demanding of the ECB, it referred to the effects of the bank's policy "on virtually all citizens...as shareholders, tenants, real estate owners, savers or insurance policy holders".
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