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Very worried about the future of Europe post @BVerfG. Europe cannot work if national Constitutional Courts decide unilaterally when the Luxembourg Court has primacy. Expect Hungary´s and Poland´s constitutional court to follow this precedent https://www.bundesverfassungsgericht.de/SharedDocs/Pressemitteilungen/EN/2020/bvg20-032.html …
.@ECB has been weakened: the cover provided by Luxembourg Court is gone. ECB no longer has “broad discretion” to do "whatever it takes" with limited judicial review (see 73, Weiss). It now has to motivate its actions--to judges who show no knowledge of econpic.twitter.com/YBHRy8JaBR
For the @ecb to make sure we do not fall again into a financial crisis through feedback between sovereign and banks spreads("doom loop")it will need to direct its support to countries at risk. PEPP was largely about eliminating those self-imposed limits.@BVerfG fatally weakens itpic.twitter.com/yfFspuuADm
We are back to the start: if @ecb wants to support Italy, it will need to ask ESM for a program (the Pandemic support program). OMT was the answer all along
The German Court fatally weakens the two key common European institutions: @ecb and Luxembourg Court.
The future of Europe is at stake, and Germany does not really know if it cares enough about it. This is pretty simple: the EU will not surive if Germany does not want it to.
A journalist just called me to ask me about self imposed limits of ECB. I expain it in this Youtube presentation starting in minute 32. I will add an explanation in this thread briefly https://www.youtube.com/watch?v=VCz9dV3Z5Lo …
Art. 123 TFEU prohibits monetary financing "Any type of credit facility with the European Central Bank […]in favour of […]central governments, regional, local or other public authorities[…]shall be prohibited."Rules out e.g. what Bank of England is doing (lending to Treasury)
Central bankers have interpreted this to imply two self-imposed limits on their purchases - Not to buy more than 33% of any issuance - Buy their sovereign bonds following its own capital contribution key
How close are bond purchases to the capital key? The requierement has been interpreted losely up to know, as a medium term objective. Indeed, there is a notable deviation for Italy and Francepic.twitter.com/ZgZLx9cfOy
The PSPP and the Pandemic Emergency Purchase program explicitly are designed (see language above in Thread) with the idea of moving beyond self imposed limits ("no limits") and eliminate the risk of a new financial crisis with spreads wideningpic.twitter.com/mWsNCuvnpN
These years member states have enormous borrowing needs: €2tr already announced for 2020. Will they be able to sustain market access without seeing large increases in interest rates or, worse, self fulfilling spirals of loss of confidence?
Recall 2011 spiral: funding cost for Greece increases Funding becomes very expensive Investors worry about redenomination/currency risk ("will they exit Euro?") Sell bonds/price drops—Interest rate goes up Increasing break up risk etc
Even with PEPP it may not be enough: If we assume they continue to buy at the rate they have been buying (the one needed to keep markets stable), the money would run out in early Octoberpic.twitter.com/ebqesCtwLm
What are the alternatives now? - Increase hugely PEPP and PSP to make sure that can buy enough Italian debt while keeping close to capital key - Italy acceps new Pandemic line of ESM and its debt is then elegible for OMT
In any case, the governments/Council need to react now-- it cannot be that all the effort of sustaining the EMU is made by the @ecb. We need a substantial common fiscal effort, in the form of a large European recovery fund.
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