Head of Macro Analysis
Summary: Today at 8:00 GMT, the German Constitutional Court will decide whether the ECB's bond buying program (PSPP) is legal under German law or not. In this analysis, I discuss the two main possible outcomes and their respective market impact.
We are learning a new German word today: Bundesverfassungsgericht. For the purpose of simplicity, I will use in this article the abbreviation BVerfG. As you all know, I am not a lawyer, but I tried to look into this issue that could have major implications for the euro area and the current ECB’s PEPP.
What is it all about?
The German Constitutional Court will announce this morning whether the ECB’s public sector purchase program (PSPP) – which buys government securities in the euro area and was launched in 2015 under Draghi’s presidency to support economic activity and stoke inflation – is legal under German law.
Baseline scenario: the BVerfG sides with the ECB
Most lawyers (I think it does not make much sense to refer to economists for this matter) consider it is highly likely the BVerfG will side with the ECB and will accept the European Court of Justice (ECJ) decision of December 2018 ruling that the ECB PSPP was legal (see here, The ECB’s PSPP programme for the purchase of government bonds on secondary markets does not infringe EU law). It would make sense as the ECJ’s decision should be binding for all member states. Given that little has changed since then and that risks associated to PSPP are limited and there is no mechanism of burden sharing – which could be one reason pushing the Court to rule against the PSPP – we basically expect that the BVerfG’s ruling will be a non-event with little market impact.
Downside scenario: the BVerfG imposes restrictions
Instead of ruling that the PSPP is illegal (a possibility which is only considered by a minority of experts), the BVerfG could rule it is legal but imposes restrictions on the Bundesbank participation. It could mean that the German central bank would not be able to purchase as much assets as normally possible within PSPP. It is a bit unclear what would happen next. Some experts, notably Martin Selmayr, former Secretary-General of the European Commission, consider that the purchases of German debt could be delegated to another national central bank under Art. 9.2 of the ECB Statute which states that: “The ECB shall ensure that the tasks conferred upon the ESCB under Article 105(2), (3) and (5) of this Treaty are implemented either by its own activities pursuant to this Statute or through the national central banks pursuant to Articles 12.1 and 14”.
There is less doubt on the immediate market reaction in case the BVerfG imposes restrictions. As this scenario has not been priced in in the market, it could seriously undermine the euro which is trading around 1.09 against the USD at the moment. Investors would not take long to extrapolate that new complaints could emerge regarding the ECB’s action that could ultimately constrain PEPP in the future. In the long run, it could also seriously question the political role of Germany within the euro area, which already strongly opposes to debt mutualisation through coronabonds, and cause political destabilization in Germany. Whatever will be the ruling this morning, it is more than probable we will see more legal disputes in the future, especially concerning the current PEPP and the flexible manner in which purchases are done.
If you want to go into further legal details before the decision is released, I strongly advise you to read the great Twitter threads written by Lucas Guttenberg, deputy director at the Jacques Delors Institute, and Sebastian Grund, former lawyer at the ECB.
I will post my comment following the ruling on my Twitter account @Dembik_Chris.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
