Europe and ECB at the limit

The economy in the euro zone is plunging into by far the deepest crisis since the introduction of the common currency. In its current spring forecast, the EU Commission even speaks of Europe 2020 experiencing an economic shock the likes of which have not been seen since the Great Depression. Economic output in the euro zone is therefore likely to shrink by 7.7 percent this year. Although a significant recovery is predicted for 2021, it will not be able to make up for the major slump.

According to our updated forecasts, the downturn is likely to be even more severe this year. We expect the euro zone to shrink by a good nine percent. Whether this will be followed by a rapid recovery is anything but certain. Even if the EU Commission, national governments and the European Central Bank do everything in their power to achieve this.

The ECB has come under additional pressure this week due to a ruling from Karlsruhe. The Federal Constitutional Court has partially upheld a complaint against the government bond purchase program (PSPP). The court primarily admonishes the lack of a test of the proportionality of the chosen means and thus also challenges the decision of the ECJ, which had declared the PSPP admissible. The BVerfG gives the ECB three months to justify the proportionality of the chosen means to the public in a comprehensible manner. Even if the financial markets have hardly reacted to this ruling, it could still develop into a burden on the independence and capacity to act of the ECB in the long term.

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