In a stunning turn of events, the German constitutional court announced that the European Central Bank (ECB) Asset Purchase Program (APP) might be unconstitutional under the German law. The vote over the approval of the APP program was expected to show its legality – and it did, as the court ruled 7:1 in its favor. However, changes to the statement undermine the Euro and the European project.
Effectively, the court said that the ECB had not done proportionality analysis, and the European Court of Justice should have asked for it. While it seems like a simple formality, it is bad news from the recently launched PEPP (Pandemic Emergency Purchase Programme).
The PEPP which is designed to be temporary, and, under the main APP, means the ECB can buy both private and public securities to the tune of about €750 billion. The program was announced by the ECB as one of the main tools to finance the Euro area members’ economies during the coronavirus pandemic.
Shooting Down the Euro
The implications of today’s vote are that in order to comply with monetary financing prohibition, issuer limits and capital keys are essential. Hence, bad news for the PEPP program even before being used.
The markets reflected it quickly – the EURUSD fell dramatically from above 1.10 on Friday to close to 1.08 after today’s court ruling. However what is more troubling is that the 10 year risk spread over Germany jumped to 237 basis points, a move reflecting investor’s uncertainty over the future of the European project as a whole.
It is not difficult to imagine that new court cases will come up immediately in Germany against the PEPP, blocking the access to funding for many troubled economies. If you think of the fact that it is only about terminology (monetary policy vs. economic policy), today’s decision shows the ridicule of the situation when economies troubled by high unemployment rates and battered by pandemic see their access to funds endangered.
The Euro is the pillar of the European Union, albeit not all EU members use it. Undermining the ECB’s decisions may encourage the rise in Euro skepticism.
If the 2010 Eurozone sovereign crisis taught us something, timing could not have been worse for such a decision. It creates a rift in the interpretation of the EU law between the union at national level, which is something not needed in an economic crisis.