The Daily Update: EU Numbers Miss / RRF Legal Risk

This morning we had industrial production numbers out of the EU, with the zone’s two largest economies, Germany and France both seeing unexpectedly large declines. Germany's output dropped 1.6% in February, with analysts going for a 1.5% rise. The figures out of France were even worse, where the estimate was for a .5% increase, with the actual number at minus 4.7%. Spain was equally disappointing with a minus 3.4% downturn. France's decline for the steepest in nearly a year and was led by the automotive sector, down nearly 11.5%. Earlier this week our nearest European neighbours cut its growth forecast for 2021 from 6% to 5%.

On top of this Isabel Schnabel, a European Central Bank Executive Board member, has warned that ongoing legal challenges to the European recovery fund at Germany’s top court could be disastrous for the region’s economy. In an interview with the German press, she said that it would be an ‘economic disaster for Europe if the disbursement of the funds were to be delayed indefinitely’, adding that if that were the case ‘Europe would have to think about alternative solutions, but that could take some time’.

The feeling is that Germany's Constitutional Court is likely to allow ratification of the law underpinning the European Union's EUR750 billion Recovery and Resilience Fund (RRF) soon. However, there is still a measurable risk a legal challenge could delay the post-Covid reconstruction programme. Last month the court suspended ratification of the EU Own Resources, which all EU countries must ratify before moving forward with the RRF. This was due to a legal challenge claiming the Own Resources legislation violates EU treaties by opening the way to joint eurozone borrowing. But EU officials point out that the fund is a one-off, targeted crisis measure.