Christine Lagarde Bce Ebc (La Presse)

Will Lagarde’s Expanded COVID-19 Stimulus Rescue the Eurozone?

In a desperate attempt to mitigate the economic effects that the coronavirus has had on the EU’s economy, the European Central Bank’s (ECB) President Christine Lagarde announced on Thursday that the central bank will increase its Pandemic Emergency Purchase Program (PEPP) by €600 billion.

The amount comes on top of €750 billion of government bond purchases that the ECB announced in March. Altogether, the program will cost €1.35 trillion.

Furthermore, the EU institution said that the duration of its COVID-19 bond-buying program would be extended from the end of 2020 until June 2021, or until the bank believes that the crisis is over.

Lagarde’s Announcement Calms Markets

The central bank’s announcement has already had a positive impact on the market as it contributed to a further reduction in lending costs, with the yield on Italy’s 10-year government paper dropping from 1.56 percent to 1.40 percent shortly after the decision was announced.

The euro was 0.25 percent higher than the US dollar following the ECB’s announcement.

The coronavirus has had a severe impact on the EU’s economy. According to data obtained by CNBCthe unemployment rate rose from 7.1 percent in March to 7.3 percent in April due to the lockdown impacting upon jobs.

Nonetheless, manufacturing and services activity reached a three-month high in May.

Lagarde Will Not Let the Eurozone Collapse

By expanding the ECB’s bond-purchasing program, Lagarde has proven yet again that she will do whatever it takes to prevent the eurozone from collapsing and that she will amend the central bank’s own rules to thwart such an outcome. However, the ECB President still has many obstacles to overcome before she can claim that her bond-buying program is a total success.

The German Constitutional Court remains firmly opposed to the Bundesbank’s participation in any EU bond-purchasing scheme. Last month, Germany’s highest court declared that the PEPP must be ‘proportionate.’ This is despite the fact that the European Court of Justice (ECJ), the highest court in the EU, ruled in December 2018 that the ECB’s bond-buying program is legal. Germany’s highest court maintains that the ECJ had acted outside of its powers and its judgment is considered arbitrary, which shocked the President of the European Commission, Ursula von der Leyen, at the time, and many others.

The Guardian reports that Lagarde is confident that a good solution will be found that does not compromise the ECB’s independence. Despite this, there is no guarantee that the German Constitutional Court will share Lagarde’s optimism regarding the central bank’s PEPP.

The ECB President told a press conference that there is a “broad consensus” over the new stimulus package, but that remains yet to be seen. If a compromise solution cannot be reached with Germany’s highest court, then it is difficult to see how Berlin can legally participate in the PEPP. That is why some could argue that the German Constitutional Court may have killed the eurozone.

The Eurozone’s Fate Rests in Germany’s Hands

Ultimately, the eurozone’s fate will be determined by the German Constitutional Court. If Germany can legally participate in the PEPP, then Lagarde would have got her way, but the stimulus is only the beginning in terms of reforming the eurozone further. For the eurozone to survive in the long-term, it needs further integration and monetary reform, otherwise it will be very difficult to maintain its existence in the future.

Lagarde may be confident that she can compromise with the German Constitutional Court, but considering they opposed the original stimulus, a much larger one might be hard for Germany’s highest court to stomach. But at least for now, the ECB President can celebrate the announcement of her latest stimulus package, even if it means that her struggles have only just begun.