6 May - update from our investment partner

  • 6th May 2020

What has happened

Yesterday saw a broad rally in risk assets but the Euro did not take part as the ruling from the German Constitutional Court weighed on risk appetite. Whilst the ruling didn’t say that quantitative easing was illegal under German or EU law, it is a reminder to the market that there is no consensus on even monetary stimulus within Europe. Investors are concerned that if a 5-year-old quantitative easing plan makes the German judiciary uneasy the less constrained pandemic programme may cause broader issues.

Does the decision derail the pandemic response

The Pandemic Emergency Purchase Programme (PEPP), which was launched on 18th March, does not meet the criteria used by the German court to deem that the PSPP (one of the original ‘brands’ of Quantitative Easing) was legal. This suggests that it could be successfully challenged in the German courts. After all, the ECB Governing Council has made clear its intention to deviate from the capital key and exceed the issuer limits, and its inclusion of Greece’s sub-investment grade bonds in the programme may also be problematic. That said, the German constitutional court moves so slowly that the pandemic will (hopefully) be ancient history by the time they pass judgement on it.

The EC Spring Forecast

This morning the European Commission released its spring forecast with an estimate that EU output will fall by 7.4% in 2020. The Commission again called for a pan-European recovery plan to sit alongside the national programmes released so far. The specific wording addresses the elephant in the room: “The risk otherwise is that the crisis will lead to severe distortions within the Single Market and to entrenched economic, financial and social differences between euro area Member States that could ultimately threaten the stability of the Economic and Monetary Union.” The EC joining the ECB in calling for this broad coordination increases the volume of request for fiscal burden sharing but this does not mean that the Northern bloc will be forthcoming as they fear lending their balance sheets to a less fiscally prudent South creates moral hazard.

What does Brooks Macdonald think

Crises bring the same old issues to the fore and the German Constitutional Court ruling is another reminder that despite the desires of EU institutions, such as the ECB and EC, national governments still remain lukewarm on burden sharing. We are likely to see sufficient political fudges to allow markets to look through these uncertainties but this does not mean that the fundamental challenge will go away post coronavirus.

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