5 May - update from our investment partners

  • 5th May 2020

What has happened

Many European markets had to play catch up yesterday as they were closed for the sell-off on Friday. As the US session drew to a close a bout of optimism returned. This positivity came from coronavirus numbers in California, one of the hardest hit US states. Fatalities were at their lowest level since early April and the state could start to reopen as soon as Friday. For today, eyes are on the German Constitutional Court ruling and what that means for European solidarity.

What did the court decide

The German Constitutional Court’s has ruled that some aspects of the ECB’s Public Sector Purchase Programme are unconstitutional given the ECB’s mandate and the EU treaties. The 7 to 1 ruling shows a mistrust by the German Constitutional Court over what they perceive as scope creep by the European Central Bank. Given Germany’s economic size within both the EU and the Eurozone, a failure for the Bundesbank to support future risk mutualisation would be a negative for European risk assets. The ruling may confirm to many German politicians that the ECB is already overstepping its mandate into a grey area and providing monetary support to member states. This will put pressure not only on future quantitative easing participation but also deliver political pressure to not support fiscal burden sharing. Whilst fiscal burden sharing is a separate topic to the ECB’s monetary activity, if there is a feeling the central bank has already allowed burden sharing via the back door fiscal support may look even less likely going forward.

What does Brooks Macdonald think

The German Constitutional Court’s decision highlights the lack of unity in Europe over the need or legal ability to provide support for weaker member states. Whilst there is a monetary union within the Eurozone, a lack of fiscal union has proven problematic during the Eurozone debt crisis and more recently during the coronavirus pandemic. The German court ruling that aspects of the ECB’s quantitative easing is unlawful shows a lack of unified support for burden sharing even within the monetary union. A lack of economic coordination within the Eurozone has been a key driver of our underweight to European equities and today’s decision muddies the water further.

All data and figures referred to in our news section are correct at the date of publishing and should not be relied upon as still current.