COVID-19 is catapulting the world into a new era of central banking—helping governments finance growing debt by capping bond yields near zero. Despite some hurdles, we’re confident that this will play out just as powerfully in the euro area as elsewhere. That’s why we remain constructive on peripheral euro-area bond markets.

“Joined at the Hip” Works in Europe Too

In this new era, monetary and fiscal policy are closely coordinated—“joined at the hip.” But the complex way the EU is structured can create obstacles to this coordination. Indeed, some investors fear that Germany’s deep aversion to monetary financing will prevent the European Central Bank (ECB) from keeping a lid on bond yields.

Those fears seemed to be realized on May 5, when the German Federal Constitutional Court (GFCC) ruled that the European Central Bank (ECB) might have exceeded its mandate with the implementation of its Public Sector Purchase Programme (PSPP).

The GFCC ruling is an important reminder that many of the ECB’s actions remain controversial in Germany. It also highlights the tensions at the heart of the European Union (EU), particularly the separation of powers between the EU and its member states.

But it’s most unlikely to impair the ECB’s willingness or ability to keep bond yields low. The European Court of Justice (ECJ)—not the GFCC—has jurisdiction over the ECB and has already ruled that the PSPP is legal. That’s why the GFCC’s ruling did not prevent the ECB from increasing its asset purchase program by an additional €600 billion on June 4.

The GFCC ruling has had some impact though. During the press conference on June 4, President Lagarde was quick to emphasize that the ECB’s actions were “proportionate” to its aims and that the Governing Council had carefully weighed the costs and benefits before reaching its decision.