Week Ahead (11 May)

w/c Monday 11 May, European Commission to consider infringement proceedings against Germany following ruling of German Constitutional Court

Following the ECB’s rejection of the German Constitutional Court (FCC) demand that it provide a new legal justification for QE within three months, the European Commission responded to the ruling yesterday by outlining the possibility of opening up infringement proceedings against Germany. Commission President Ursula Von Der Leyen issued a statement which said that “The final word on EU law is always spoken in Luxembourg. Nowhere else.”

A response from the European Commission was necessary given that the FCC ruling suggested that similar courts in Spain, Italy, France, Austria, Sweden, Poland, Hungary and the UK could also rule on the proportionality of measures adopted by the EU institutions. In the aftermath of the ruling, Julia Przyłębska, Chief Justice of Poland’s Constitutional Court pointed to the decision as evidence that, like the German constitutional court, the court she heads has the right to have the final word on whether European laws are compatible with Polish constitutional arrangements.

The ruling also presents a massive headache for the Bundesbank which, an anticipated in our preview piece, is now in the invidious position of having to provide a justification for a programme which its President Jens Weidmann has consistently opposed since its inception, or face having to unleash financial market chaos by dropping out of QE.

While this ruling did not pertain to PEPP per se, the legal limitations it outlined for the ECB renders the PEPP’s legality questionable, at least in the eyes of the FCC. In both March and April, even under the standard QE programme (PSPP), the ECB deviated significantly from its capital key buying €6 billion more worth of Italian bonds than the capital key would allow – something which the FCC ruling would deem illegal.

Bernd Lucke, one of the 18 plaintiffs in this case, has stated that the ECB must incorporate the FCC findings into the PEPP and that in the absence of such a decision he would “go straight to the constitutional court and ask for an injunction.” While the FCC rejected similar requests in 2017 and 2019, it may take a different view in the aftermath of this week’s ruling.

W/C Monday, 11 May - Next round of EU-UK trade talks to begin

The latest round of talks on the future relationship between the UK and the EU take place this week, with EU negotiators warning that substantial progress must be made on outstanding issues if a deal is to be reached. As reported previously, the UK has threatened to pull the plug on negotiations if it deems that sufficient progress is not made by the end of June. Fisheries and an agreement on the level playing field remain outstanding, as do issues around security, financial services and the role of the Court of Justice of the European Union.

Whether a deal between the UK and the EU is reached or not, the Ireland protocol must be implemented. The protocol will effectively create a customs border between Northern Ireland and the Great Britain, with Northern Ireland remaining aligned with the EU on some standards to ensure food, animals and permitted industrial goods can move freely across the Irish border. It is understood that the EU has identified that some goods may be exempted from tariffs if the tariffs do not substantially differ between the two sides and which are for use in Northern Ireland, potentially allowing supermarkets to benefit from the transfer of goods from Great Britain to Northern Ireland.

However, the EU does not intend to go outside the framework of a full customs border on the Irish Sea. The protocol is specific that all goods going into Northern Ireland should be compliant with EU customs codes, meaning that there will have to be veterinary checks on animal exports and all exports will have to be subject to security checks. The refusal of the UK to engage in a fulsome manner on the specifics is understood to be testing the goodwill of the EU.

W/C Monday, 11 May - Green Party to participate in Irish Government formation talks

Talks between Fianna Fáil (FF), Fine Gael (FG) and the Green Party (GP) will take place this week. In order to comply with public health guidelines, 2-3 meetings will take place per day, each lasting up to two hours.

The outcome of these talks is far from a foregone conclusion as a two-thirds majority among party members is required for the GP to enter government. GP deputy leader Catherine Martin is understood to have voted against entering coalition talks and will now lead the GP negotiating team.

The challenges faced by the potential government were made clear on Thursday when the European Commission revealed its Spring Economic Forecast. It is anticipated that the Irish economy will contract by 8% this year, followed by a rebound of 6% growth in 2021. CSO figures released on Friday show the unemployment rate at 28.2% - the highest rate in the history of the state.

The bleak economic outlook suggests that a new government, faced with higher debt combined with a sharp drop in tax receipts, will struggle to find wiggle room in which to facilitate the ambitions of the GP. Recent estimates of some of their policies, including a steady increase in carbon tax and a 7% yearly reduction in emissions to 2030, have highlighted the expense involved in the transition to a low-carbon economy. FF and FG have committed not to raise personal income tax, corporation tax or the universal social charge. In this context it will be difficult to find the funding required to satisfy the GP’s ambition for a massive green investment plan.

W/C Monday, 11 May - UK economic data to show effects of pandemic mitigation measures

Economic data to be released this week will highlight the early effects of the Covid-19 pandemic on the UK's economy. UK retail sales data and GDP for Q1 2020 will be released on Wednesday, followed by the residential market survey results on Thursday.

March 2020 saw monthly retail sales volume fall sharply by 5.1%; the largest fall since the series, as a result of many stores ceasing trading on foot of official government guidance.

The UK's GDP results are also likely to show, in part, the effects of the pandemic mitigation measures. Given that the lockdown was only announced in the UK on 23rd March, figures for the first three months of the year may not show the full picture of the economic difficulties the UK now finds itself in.

The freezing of the home sales market has been government policy since the lockdown began, with the government telling people to delay their home moves if possible and not to allow new viewings. The March residential market survey showed that while prices had been increasing in the first three months of the year, the sales outlook had turned negative, while the rental market showed signs of resilience.