Devil in the detail: BVerfG, Coronabonds and EU budget

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  Today, the European Commission (EC) is due to present a draft budget and coronavirus plan. It should clarify the debate about loans versus grants and also highlight key projects and sectors that could receive financing (such as airlines). However, it is likely it won't constitute the step forward to prepare now for tomorrow's economy.


It’s a very busy week for the European Union.

Yesterday, the German Constitutional Court partly dismissed ECB QE case. It confirmed there is no breach of monetary financing of governments - which is the most important point – but it also asked the ECB to justify bond-buying program.

“Following a transitional period of no more than three months allowing for the necessary coordination with the Eurosystem, the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB 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 program”.

Asking for an impact assessment of the ECB monetary policy is ironically the most EU thing ever. Our understanding of the 3-month period given to the ECB to “fix QE” is that the ECB basically needs to provide documentation demonstrating there is a balance and proportionality between the policy objectives and the policy effects. Immediately after the ruling, the ECB received many messages of support, notably from the EC which reaffirmed that the ECJ’s decision of December 2018 stating that QE is legal is binding on all national courts (see here the ruling). In our view, the German Court ruling is mostly a shot across the bow that does not really challenge the ECB ability to continue both APP and PEPP or seriously question the Bundesbank participation to these programs as long as they are viewed as temporary. This interpretation is corroborated by the ECB’s statement released yesterday evening indicating the central bank takes not of the ruling but “remains fully committed to its mandate”. However, it certainly does not close the door to further legal actions in the near future regarding PEPP and the flexible manner in which purchases are done. The legal saga continues.

The testy debate over coronabonds is probably closed. Earlier this week, France’s finance minister Bruno Le Maire confirmed to a French newspaper that he will not go ahead with coronabonds if Germany does not endorse the project. Officially, France does not want that an initiative supported only by a group of member states leads to a fragmentation of the euro area. This is certainly a very good argument. The unofficial reason for dropping the idea of coronabonds is also that France does not want to pay the risk premium resulting from debt mutualisation with countries perceived as financially more vulnerable. Such a reversal of position is not surprising as France’s European diplomacy has basically consisted in asking for the maximum and ultimately accepting the bare minimum over the past six years.

The risk is elevated that the EU budget will be a new missed opportunity.

Following the European Council’s decision of 23 April 2020, the EC is due to present a proposal of budget and coronavirus plan. It is an understatement to say that expectations are very low. The total amount mobilized could reach €1 trillion, which is quite substantial, but as it is always the case with the EU the devil is in the detail. The EU has often the bad habit to re-classify /re-direct already planned expenditures or to include private funding that is not yet on the table, as was the case with the Juncker plan, which makes the real package often much smaller !

On the upside, the EC should clarify a bit the toxic debate between loans and grants, though final approval is up to member states. It means that nasty discussions behind closed doors about the financial mechanism are not over yet. On a final note, it is highly likely the EC will unveil a list of sectors that could benefit from the recovery package based on at least the three following criteria: the European scope of the market, restoring supply chain resilience and avoiding distorting competition. Quite logically, airlines and the automotive industry should be amongst the main beneficiaries.

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)

Trade Responsibly
All trading carries risk. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more
Additional Key Information Documents are available in our trading platform.

Saxo Markets is a registered Trading Name of Saxo Capital Markets Ltd (‘SCML’). SCML is authorised and regulated by the Financial Conduct Authority, Firm Reference Number 551422. Registered address: 26th Floor, 40 Bank Street, Canary Wharf, London E14 5DA. Company number 7413871.

This website, including the information and materials contained in it, are not directed at, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in the United States, Belgium or any other jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation.

It is important that you understand that with investments, your capital is at risk. Past performance is not a guide to future performance. It is your responsibility to ensure that you make an informed decision about whether or not to invest with us. If you are still unsure if investing is right for you, please seek independent advice. Saxo Markets assumes no liability for any loss sustained from trading in accordance with a recommendation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc. Android is a trademark of Google Inc.