News & analysis

Today’s headlines are marked by the ongoing story of the German Federal Constitutional Court’s ruling that the European Central Bank must provide justification for its QE program within three months.

The program in question is the Public Sector Purchase Program (PSPP) and would no longer have support from Bundesbank if the ECB fails to provide satisfactory justification for the program in the given time. The danger lies in the fact that unless the ruling is completely dismissed and the ECB finds the means to provide information that the Court is willing to consider, the ECB’s independence is in danger of being.

The question now is whether the ECB will accept the jurisdiction of the German Court, and if that translates in saying that national courts can review monetary decisions.

At this point, the ECB has not explicitly stated whether or not it has plans to comply, however, ECB Governing Council member Madis Muller sounded conciliatory this morning and stated that the central bank is “certainly able” to show its measures were proportionate, a key requirement the GFCC set out. Bundesbank President Jens Weidmann said to the German newspaper Die Zeit that the extraordinary measures enacted by the ECB were necessary to support the eurozone economy, but at the same time, the GFCC ruling is justified and the barrier between monetary financing and quantitative easing should be contained.

The euro is still trading on the back foot since yesterday’s announcement by the Court, but even in the longer run, the situation may be enough reason for the euro to lose its footing as it may set the stage for other judicial systems in rejecting ECB rules.


EURUSD struggles to recover after GFCC decision

European Commission releases gloomy economic forecasts

In one line, the European Commission foresees a deep and uneven recession in the euro area that will bottom out in Q2, with a highly uncertain recovery path ahead. Overall, real GDP in the Eurozone is expected to crash by 7.7% in 2020, far deeper than the 4.3% in the 2009 recession during the financial crisis. Output will be severely hit in the second quarter of the year, clearing prospects for the worst economic recession in EU history. GDP growth is expected to rebound by an annual pace of 6,3% in 2021, leaving the EU economy 3% behind the pre-crisis estimated output level. This means that, even when the bounce back will likely be more sharp and quick than in the financial crisis in 2009, the recovery will be incomplete over the forecasting horizon.

A few patterns to highlight:

  • The recession will break through all economic sectors, although the biggest hit will likely land on the services sector and tourism in particular.
  • The economic collapse and further recovery will hit across all economies within the area but in an uneven manner. Among the largest member states, the projected rebounds are more asymmetric than the expected declines, with Italy and Spain –the worst hit by the pandemic- experiencing worse recoveries.
  • All demand components will be dragging severely on GDP growth, with the exception of public consumption and investment, which are set to play a counter-cyclical role. Private consumption should be the fastest to recover after a record drop in Q1, but uncertainty in the labour market will likely increase precautionary savings. The expected rebound of euro area investment next year should only help to recover some of the lost ground, with a projected shortfall of 6% compared to baseline estimates before the crisis for the year end. Net exports will add only a small contribution to growth, also meaning that the euro will receive only a mild boost from current account pressures.
  • The path of recovery outlined contains unprecedented levels of uncertainty, given the nature of the underlying assumptions. Should any of the conditions divert from the given guidelines, forecasts could widen substantially, with risks mostly tilted to the downside. As per the currency standpoint, this could imply an ample degree of volatility, although it should be partly reduced by appropriate liquidity provision and monetary policy response towards preserving financial stability.


Projected real GDP growth path in the Euro area



Olivia Alvarez Mendez, FX Market Analyst
Ima Sammani, Junior FX Market Analyst



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