Last Tuesday, the German Constitutional Court decided that some of the European Central Bank (ECB) Asset Purchase Program (APP) actions were illegal. The ruling sent the Euro on a spiral death, just a few days ahead of May 9th Europe Day celebration.
From close to 1.10 at the start of the previous week, the EURUSD pair fell to below 1.08 – a dramatic move, having little or no pullbacks. The market’s reaction was right – Europe and the Euro suddenly faced a fundamental problem.
The ruling shows just how weak the system is. The overall problem is not about Germany disapproving quantitative easing (after all, quantitative easing or asset purchase programs are common monetary policy tools worldwide these days), but the implications of its decision. More precisely, the decision questions the ECB’s independence, as a national/regional constitutional court rules about a central bank’s decisions.
The Eurozone and the Euro as a common currency were implemented to unify Europe. Contrarians always questioned the viability of the project, as there is no fiscal union, and solidarity is not the strongest point in Europe. The blow from the German decision feeds bearish views about the Euro and the European Union.
Despite quick remarks from the ECB and even the German national bank, Bundesbank, the Euro traded with a bearish tone all week with little or no sign of recovering. Investors interpreted that the very ECB independence is at stake. After all, if a national court questions the ECB mandate, it sets a precedent for future legal cases all over the Euro area.
Trust is all that matters for financial markets. After all, a fiat currency, like the Euro, is valued by the trust its users have in it. Because Germany is Europe’s economic engine, questioning the Euro sends negative vibes across financial markets.
But this is not the first Euro crisis. Since its inception in the late 1990s, the Euro faced serious survival tests – the 2008 financial crisis, the 2010 Greek sovereign crisis, and now the coronavirus pandemic. It survived despite all doom and gloom.
However, one should not stop wondering why Europe would do this to itself. Caught between the coronavirus pandemic and the upcoming US Presidential election, the Euro needs no internal problems.
Yet, it just faced one of the most dramatic weeks since its existence.