By Howard Schneider
WASHINGTON (Reuters) – As the U.S. economy began crawling out of recession in 2009, policymakers got a rude surprise: a new round of intensifying problems in Europe threatened to break up the euro zone currency union and weighed on hopes of a faster global recovery for years to come.
With a German court ruling on Tuesday challenging key European Central Bank policies, U.S. officials are again concerned Europe’s internal bickering could damage a global economic rebound, this time from the coronavirus pandemic.
“This will be the second time we have been in a major crisis where the ECB has been put under heavy pressure,” St. Louis Federal Reserve president James Bullard said on Tuesday. “It is very tough going, lots of negotiation, lots of question marks about what policies would even be acceptable or allowable… It would help the United States and it would help Europe to have something more at the federal level that would have more authority, more power, more ability to borrow.”
Germany’s Constitutional Court on Tuesday gave the ECB three months to prove that a signature bond-buying program was justified despite some of its potential negative economic impacts.
The ruling called into question the viability of a program in which the ECB has bought more than $2.17 trillion of government bonds over the last five years – purchases critical to keeping the euro zone intact after a crisis over government debt in countries like Greece and Spain.
It could also impede the ECB’s plans to loosen its rules further for bond purchases under a new Pandemic Emergency Purchase Programme. The effort would lift caps on the amount of a country’s debt the ECB could own, and also boost limits requiring purchases to be roughly in line with the relative size of euro zone economies.
Lifting those rules would recognize the disproportionate impact the virus has had in some nations, particularly Italy, and recognize the longer road they face to recovery.
But it also would aggravate the same tensions over cost and risk sharing that led Germany a decade ago to oppose efforts to ease debt-driven economic crises in several eurozone nations.
Purchases could continue under the court’s ruling, but the German Bundesbank might not be able to participate.
With the world already uncertain about the path of recovery once the virus is controlled, Bullard said he hoped Europe would find its way to a clearer, unified policy.
“This very much is a stress test for the euro and the European project to be able to react to this crisis in an effective way,” Bullard said in web cast remarks. “I am just hopeful this will be a catalyst.”
(Reporting by Howard Schneider; Editing by Dan Grebler)
