The market mood somewhat bettered on prospects of business reopening, as US President Donald Trump said they need to get the economy
running despite more people being affected by the virus.
The market mood somewhat bettered on prospects of business reopening, as US
President Donald Trump said they need to get the economy running despite more people being affected by the virus.
But the sentiment
remains fragile, as today’s ADP report should confirm more than 20 million private job losses in the US last month – enough to dampen the mood
despite the US’ all-in monetary and fiscal support to prevent the economy from falling to pieces.
The European Central Bank (ECB) on
the other hand responded to German’s court judgement which asked the bank for proof that its Quantitative Easing has not gone beyond the law.
The ECB’s governing council pledged that they would continue doing anything necessary to revive inflation. But Draghi’s ‘whatever it
takes’ may be running into a brick wall as the ECB’s biggest weapon to revive inflation deals heavily with government debt, and crosses a fine
political line.
In fact, the German discontent with the ECB’s massive bond purchases program is nothing new, but it takes another
dimension as the German court now clearly declared the ECB’s Public Sector Purchases Program (PSPP) which has started in 2015 as partially
illegal, provided that the spending is not approved by the government nor the Parliament. According to Germans, the ECB may have gone too
far, well beyond its mandate, as its actions severely impact the financing by government debt, and it indeed is a political issue.
Hence,
yesterday’s German court decision raised concerns that the Bundesbank may not participate in the bond purchases program, unless the ECB’s
Governing Council ‘adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy
objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme.’
Now,
it is important to highlight that the German court didn’t consider the ECB’s PSPP program as a violation of the ban on monetary state
financing and will probably continue contributing to the program, while waiting for a justification of proportionality from the ECB
council within the next three months. But during this period, the upside potential of the single currency will likely be limited, as the
risks of Germans not accepting the ECB’s justifications will remain on the back of any euro holder’s head. More importantly, however, the
German decision on PSPP gave a warning that the current PEPP program may also be at jeopardy. As such, the German court targeted the PSPP, but
may have hit the PEPP. And, if the ECB’s scope of action narrows, the European economies may lose the much-needed support from the ECB.
Especially provided that the finance ministers have recently failed to seal a clear, satisfactory deal on the fiscal deck.The market mood
somewhat bettered on prospects of business reopening, as US President Donald Trump said they need to get the economy running despite more
people being affected by the virus.
But the sentiment remains fragile, as today’s ADP report should confirm more than 20 million
private job losses in the US last month – enough to dampen the mood despite the US’ all-in monetary and fiscal support to prevent the economy
from falling to pieces.
The European Central Bank (ECB) on the other hand responded to German’s court judgement which asked the bank
for proof that its Quantitative Easing has not gone beyond the law. The ECB’s governing council pledged that they would continue doing
anything necessary to revive inflation. But Draghi’s ‘whatever it takes’ may be running into a brick wall as the ECB’s biggest weapon to
revive inflation deals heavily with government debt, and crosses a fine political line.
In fact, the German discontent with the
ECB’s massive bond purchases program is nothing new, but it takes another dimension as the German court now clearly declared the ECB’s
Public Sector Purchases Program (PSPP) which has started in 2015 as partially illegal, provided that the spending is not approved by the
government nor the Parliament. According to Germans, the ECB may have gone too far, well beyond its mandate, as its actions severely impact
the financing by government debt, and it indeed is a political issue.
Hence, yesterday’s German court decision raised concerns that the
Bundesbank may not participate in the bond purchases program, unless the ECB’s Governing Council ‘adopts a new decision that demonstrates
in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the
economic and fiscal policy effects resulting from the programme.’
Now, it is important to highlight that the German court didn’t
consider the ECB’s PSPP program as a violation of the ban on monetary state financing and will probably continue contributing to the
program, while waiting for a justification of proportionality from the ECB council within the next three months. But during this period,
the upside potential of the single currency will likely be limited, as the risks of Germans not accepting the ECB’s justifications will
remain on the back of any euro holder’s head. More importantly, however, the German decision on PSPP gave a warning that the current PEPP
program may also be at jeopardy. As such, the German court targeted the PSPP, but may have hit the PEPP. And, if the ECB’s scope of action
narrows, the European economies may lose the much-needed support from the ECB. Especially provided that the finance ministers have
recently failed to seal a clear, satisfactory deal on the fiscal deck.
By Ipek Ozkardeskaya
