Focus: German constitutional court tries to rein in ECB

Short Url
Updated 12 May 2020

Focus: German constitutional court tries to rein in ECB

What happened:

US President Donal Trump wants to advance to phase 2 of reopening the economy. The White House is considering disbanding its coronavirus task force by the end of the month, while nearly 70 percent of Americans remain afraid of catching the disease.

The UK has surpassed Italy as Europe’s worst affected country, with 195,000 confirmed cases and 29,427 deaths at time of writing. The UK government is considering how to reopen the economy: Chancellor Rishi Sunak is said to be considering how to wean the country off the £39 billion ($48.25 billion) workplace support schemes he was forced to establish at the start of the crisis. The British Chambers of Commerce advocate doing so at a measured pace, warning against a “falling off the cliff” scenario.

Euro-area services Purchasing Managers Index (PMI) came in at 12, and the composite PMI at 13.6. The Shanghai composite index rose by 0.63 percent as traders came back after a 5-day break.

German factory orders fell by 15.6 percent in March, the biggest slump since data collection started in 1991. This is significant as Germany is the manufacturing powerhouse of the world’s largest economic bloc.

The earnings season continues:

Disney has taken a $1.4 billion coronavirus hit. Revenues were up 21 percent to $18 billion. Its theme parks performed particularly badly, while the movie streaming channel Disney+, which debuted Nov. 12 last year, had reached 54.5 million subscribers by May 4. Earnings per share fell by more than half to $0.60.

UniCredit came in with a first quarter loss of €2.7 billion ($2.9 billion). The bank shored up its loan loss provision to €1.26 billion, up from the previously announced €900 million. Credit Agricole shored up its loan loss provisions to €621 million.

BMW’s first quarter operating profit fell by 78 percent to €589 million. Its car sales plunged by 20.6 percent or 477,111 units. Motorcycle sales dropped by 9.9 percent.

The second quarter will be worse for car makers if April sales data are anything to go by. In the UK alone new car registrations plunged by 97 percent to 4,321, reaching levels last seen in 1946.

Germany’s constitutional court ruled yesterday that the European Central Bank (ECB) did not adhere to proportionality when purchasing assets under the Public Sector Purchase Programme (PSPP), which has spent €2.7 trillion since 2015 on the financial crisis quantantive easing scheme.

The court voiced its concerns that the bank’s primary mandate was inflation and that the PSPP risked protecting defunct companies, having an adverse effect on savers. 

Germany’s highest court gave the ECB three months to answer its queries.

The bank responded that it was fully committed to “doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim,” endeavoring to transmit price stability to all jurisdictions in the eurozone.

This had an immediate effect of the euro-dollar exchange rate. However, the options market seems to suggest a more relaxed medium-term outlook.


Germany’s highest court is casting aside a 2018 ruling by the European Court of Justice that the PSPP was legal. This has has injected uncertainty over the independence of the ECB and seems to underline the bank’s political underpinnings. It also echoes German uneasiness over prolific expansionary policies by the ECB as well as over risk-sharing among ECB member states.

The verdict cast a shadow over the ECB’s €750 billion Pandemic Emergency Purchase programme (PEPP), at a time when the bank is considering expanding its response to COVID-19. While the original public sector quantitative easing program has strict limits aimed at ensuring proportionality, such as how much of each nation’s debt it buys, most of those do not apply to the PEPP.

If the German constitutional court is not satisfied, the ECB risks the German Bundesbank (the ECB’s largest shareholder) not participating in the PEPP. This decision remains in the purview of the Bundesbank.

The PEPP has had a big impact lowering government bond yields of highly indebted southern EU member states. Immediately after the verdict, Italy’s two-year bond rose by 20 basis points.

Going forward:

The G20 Debt Service Suspension Initiative for some of the world’s poorest nations could free up more than $20 billion by the end of 2020 according to the Institute of International finance. The institute warned, though, that legal and financial obligations would warrant a case by case approach.

All official bilateral creditors of the G20 participate in the initiative. The G20 Action Plan also publicly calls on private creditors to join the initiative on comparable terms on a voluntary basis.


— Cornelia Meyer is a Ph.D.-level economist with 30 years of experience in investment banking and industry. She is chairperson and CEO of business consultancy Meyer Resources.
Twitter: @MeyerResources


I won’t quit: Lebanese PM defiant as his critics blast financial chaos

Updated 12 July 2020

I won’t quit: Lebanese PM defiant as his critics blast financial chaos

  • University president and UN human rights chief join condemnation of ‘incompetent’ government

BEIRUT: Beleaguered Lebanese Prime Minister Hassan Diab on Saturday defied a barrage of criticism to declare that his government alone ruled Lebanon and it was determined to implement reforms to resolve the financial crisis.

Diab dismissed as “fake news” reports that he was on the verge of resignation, and said: “Lebanon will not be under anyone’s control as long as I am in power.”

The prime minister spoke after UN human rights chief Michelle Bachelet warned that Lebanon was enduring “the worst economic crisis in its history” and was “fast spiraling out of control.” 

She urged Diab’s government to initiate urgent reforms and respond to “the people’s essential needs, such as food, electricity, health, and education.”

Diab also faced harsh criticism from the American University of Beirut (AUB), where he was vice president and a professor before becoming prime minister.


UN human rights chief Michelle Bachelet urged the Lebanese government to initiate urgent reforms and respond to ‘the people’s essential needs, such as food, health and education.’

AUB president Fadlo Khuri said Diab’s government was the worst in Lebanon’s history in its understanding of higher education.

“I have not seen any shred of competence in this government since its formation six months ago,” said.

“The government owes the AUB $150 million in medical bills,” Khuri said, and he urged Diab to “at least discuss with us a payment timeline.”

Lebanon’s financial plight is illustrated by its currency, the lira, which has lost 80 percent of its value. 

The black market  dollar exchange rate on Saturday was 7,500, compared with the official rate of 1,507.

Bailout talks with the International Monetary Fund were suspended in a dispute over government debt, but Diab insisted on Saturday: “We have turned the page … and started discussing the basic reforms required and the program that the IMF and Lebanon will agree upon, which will restore confidence and open the door to many projects.”