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The economy is falling dramatically, the corona bond program will soon be exhausted and the Federal Constitutional Court is struggling in between: But for ECB head Lagarde, these are not the only concerns.
By Klaus-Rainer Jackisch, HR
Corona destroys every plan. This also applies to the ECB. Had the pandemic not ended, the monetary authorities of the 19 euro countries would now be in beautiful Amsterdam - because that is where this year's ECB Governing Council meeting was supposed to take place.
The central bank there, De Nederlandsche Bank, had already prepared everything. Because the national central banks always put a lot of effort into being hosts. But instead of canals, windmills, vanilla vla and cheese from Ms. Antje, there is also only one video conference this time - and ECB President Christine Lagarde also only goes online afterwards to the press.
The central bank governors and board members are currently hardly in the mood to travel. Not only because of the corona virus, but also because the economic situation in the eurozone is becoming increasingly difficult. The ECB experts went through three scenarios of how the economy in the euro zone would develop this year.
Depending on the severity of the economic shock, the gross domestic product will collapse between five and twelve percent. For a long time it had been hoped that Europe would get away with a black eye. But at least since an event in Frankfurt am Main, at which Lagarde described the situation relentlessly, there has been a hangover. The president now expects the worst scenario - a minus between eight and twelve percent. She no longer sees a chance that the eurozone will get off lightly.
The development of the inflation rate is also worrying - the degree to which the monetary authorities are aligning their monetary policy. In May, consumer prices were only 0.1 percent higher than a year earlier, according to preliminary calculations by the European statistics agency Eurostat. This is the lowest inflation rate since June 2016.
Actually, the currency keepers are aiming for a value of almost two percent. Now there are renewed fears that the eurozone could slide into deflation - in other words a spiral of constantly falling prices. Perhaps many consumers would like that, but it would be a disaster for the economy. Because under such conditions, companies get even more difficult, which would lead to cuts in production and job cuts.
The Governing Council should therefore once again significantly increase its rescue package put together in the wake of the pandemic. On the financial markets, it is expected that the bond purchase program launched in this context will be increased by at least EUR 250 billion, possibly even by up to EUR 500 billion. Some even hope to double it. It currently comprises 750 billion euros.
The ECB is currently buying bonds very quickly and to a large extent. If this continues, the volume determined so far will be exhausted in September. To make it possible at all, the monetary authorities lowered their criteria for buying these papers. Because the bond market has been bought pretty empty. In the meantime, almost everything is taken - including junk bonds from companies whose creditworthiness is more than bad.
The unresolved question of whether the Bundesbank, as part of the Eurosystem, can play along for a long time also causes concern. Because nothing has been set in stone since the Federal Constitutional Court ruled on the old PSPP bond purchase program. The judges concluded that some of these bond purchases were not compatible with the Basic Law.
The ECB had not taken sufficient account of the proportionality and the consequences of its policies. The Federal Government or the Bundestag would therefore have to obtain a satisfactory justification from the ECB within three months that would dispel these doubts. Otherwise, the Bundesbank may no longer participate in the purchase program. That would of course also apply to other programs. The Bundesbank is the largest member of the Eurosystem with just over 26 percent.
The ruling sparked a wave of reactions. Leading economists criticized it sharply and pointed out not insignificant shortcomings of the judges in the economic justification. The ECB again cannot and does not want to suspend bond purchases and, in the worst case, would continue this monetary policy even without the Bundesbank.
But this scenario is definitely to be avoided: it would be a severe blow to the eurozone and could be the beginning of the end of monetary union. Therefore, it is expected to find a friendly solution.
But it's not just about the thing itself, it's also about a very valuable asset: the independence of the central bank. It was previously sacrosanct on the German side, but is now being questioned by the judgment. Never before has a member state asked for a justification by the ECB for its monetary policy that goes beyond the contractually mandated price stability mandate.
Indeed, it is a direct attack on the independence of the ECB. For this reason, the monetary authorities must find a way to save their faces. Because nothing would be worse for the ECB than if its independence got a snap. A direct response from the ECB to the concerns from Karlsruhe to German state bodies precludes this from the outset. You may have to go indirectly through the European Parliament.
So it couldn't be any worse for the ECB: Corona is putting pressure on the economy, the monetary policy powder has largely been wasted, the speculators are already lurking and now the highest court in a central member state is firing its way.
The only hope is that you can at least get Corona under control, even at De Nederlandsche Bank. The meeting in Amsterdam is not canceled - it is only postponed. If it works, it will be made up for next year.
