Focus: German constitutional court tries to rein in ECB

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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


HK media tycoon Jimmy Lai arrested under national security law

Updated 7 min 13 sec ago

HK media tycoon Jimmy Lai arrested under national security law

  • Lai has been one of the most prominent democracy activists in the Chinese-ruled city and an ardent critic of Beijing

HONG KONG: Hong Kong media tycoon Jimmy Lai has been arrested over suspected collusion with foreign forces under the new national security law, his top aide said on Twitter, in what is the highest-profile arrest yet under the legislation.
Lai has been one of the most prominent democracy activists in the Chinese-ruled city and an ardent critic of Beijing, which imposed the sweeping new law on Hong Kong on June 30, drawing condemnation from Western countries.
The new security law punishes anything China considers subversion, secession, terrorism and collusion with foreign forces with up to life in prison.
Critics say it crushes freedoms in the semiautonomous city, while supporters say it will bring stability after prolonged pro-democracy protests last year.
“Jimmy Lai is being arrested for collusion with foreign powers at this time,” Mark Simon, a senior executive at Lai’s media company Next Digital, which publishes local tabloid Apple Daily, said early on Monday.
Police did not immediately comment.
Lai was also arrested this year on illegal assembly charges, along with other leading activists, relating to protests last year.
In an interview with Reuters in May, Lai pledged to stay in Hong Kong and continue to fight for democracy even though he expected to be one of the targets of the new legislation.