In The German Constitutional Court Torpedoes The ECB’s OMT @ Fibs & Waves Blankfeind argues that the apparently bland resolution of the GCC yesterday does include some provisions that would torpedo the OMT’s effectiveness, even its existence. Please see Die wirkliche Wirklichkeit (DwW) where such provisions are discussed, but reaching a different conclusion from the one elaborated by Blankfeind. Can Blackfeind and TYR be both right?. We think so. Blankfeind, in his excellent article, explores the aspects in the GCC’s resolution that would make life difficult for the new Draghi-ECB, namely, the illegality of the ESM’s capital being levered (financing at the ECB, like a bank), and the illegality of the ECB’s buying government bonds on the secondary market aiming at financing the member’s budgets (which is what the OMT is supposed to do). These are very strong limitations that, if applied, would effectively torpedo the ECB’s plans. DwW, while acknowledging the potential in the GCC’s ruling to abort the ECB’s plans, sustains that the “real reality” is one or several layers deeper than even a constitutional court’s ruling. In its last paragraph, DwW rethorically asks “In whose hands does Germany’s sovereignty lay?”, hinting at the possibility that even GCC’s resolutions would, one way or another, be superseded by the real owners of Germany’s sovereignty, whose identity would certainly not be the German People. In plain words, Blankfeind is right in recognizing that with its ruling the GCC (up to a point, since it could have stopped the process of ratification of the ESM and chose not to) is preparing for a fight with the ECB, Germany will fight for its sovereignty and it might be a bitter fight. DwW fears though, that, in the end, that sovereignty was lost long ago.
This sheepie accepted The Yogi Rock’s invitation to vacation in Mars, perhaps even legal residence. Was she too optimistic in assuming that her graceful jump would allow her to reach escape velocity? We think she was, and that she will be forced to stay on Earth. What’s in her mind? We think we know: “it’s easier in Mars”. Poor she!
We argued in a recent post that the ESM violates Germany’s constitution and the EU treaties. Today the German Constitutional Court (GCC) ruled that the ESM and its ‘fiscal treaty’ on budget discipline do not violate the country’s Basic Law and do not undermine the Bundestag`s sovereignty over budget issues, according to Openeurope. Although the full ruling is expected in early 2013, Openeurope remarks a few aspects of today’s resolution:
- Cap of €190bn on German ESM contribution, which can only be overturned by the Bundestag.
- Both houses of German Parliament need to be adequately informed about all ESM decisions – something which needs to be enshrined in “international law”.
- Reinforced that Bundestag approval needed for all activations of the ESM.
- Explicit ban on ESM borrowing directly from European Central Bank (ECB).
- The German Government can terminate ESM at any time, as recognised under “customary international law”.
- In its full ruling, expected in early 2013, the Court will also consider whether the ECB’s bond-buying programme, the OMT, has transferred illegal degrees of sovereignty to the EU-level.
If respected, #1 ruling would limit some of the potential risks that the creation of the ESM pose to the countries (and ultimately their taxpayers) funding the ESM, most specially Germany. Effective maximum potential financial costs to Germany would be capped at 190 billion Euros, invalidating the articles of the ESM allowing for potentially unlimited liabilities.
#2 and #3 reinforces Bundestag veto over ESM activation: the decision also states that any future ESM bailouts will require parliamentary approval, stating that the Bundestag “must individually approve every large-scale federal aid measure on the international or European Union level”.
#4 bans on the ESM borrowing from the ECB: the Court says that “borrowing by the ESM from the European Central Bank” would be incompatible with EU law (Article 123 TFEU). This is a surprisingly categorical rebuke, especially over an issue of EU rather than German law.
#6 addresses not the ESM but the latest ECB asset purchase program, named Outright Monetary Transactions (OMT). The GCC suggested in its press release that the ECB’s OMT will be considered in its final ruling on these complaints. The exact criteria upon which the programme will be assessed is unclear but broadly the Court will determine whether it transfers additional German sovereignty to the European level above and beyond that which the country has committed itself to in the EU Treaties.
What does it all mean? With a firm cap on the ESM, the ECB is now most certainly the only actor with deep enough pockets to put Spain and Italy on life-support – together with the OMT announcement the ruling has shifted the burden back to the ECB. However, the ruling and the role of the Bundestag highlights that activating the OMT will be challenging, since in order to qualify for ECB bond-buying, a country must first get funding from the ESM – and be subject to conditions. If the Bundestag agrees to activate more bailouts, it will most certainly push for harsher conditions than what debtor countries – most importantly Spain – are willing to accept. In the long-term, under current arrangements of linking ESM and OMT, the latter is also effectively capped and subject to a Bundestag veto.
If this is so, the caveats in the GCC’s resolution are not minor, why did markets continue to rally today? An answer to this question is hinted in today’s Die Welt’s article, Karlsruhe weiß, wo Europas Hammer der Macht hängt, whose last sentence goes like this: “the GCC, that for us is almost as holy as the Bundesbank, is only one of the Players in the european Game, and not the most powerful one” (“Das Bundesverfassungsgericht, das uns fast so heilig ist wie die Deutsche Bundesbank, ist auch nur ein Spieler im europäischen Spiel, und nicht der mächtigste”).
If, from a german perspective, its constitutional court is not the biggest, ultimate player, who is? If, as Die Welt’s article also implies, the GCC takes its decisions not only considering Germany’s Basic Law, but also in the context of the “wirkliche WirklichkeitI”, the “real reality”, what is that reality’s content?. Mr. Thomas Schmid, the author of Die Welt’s article, hints at the European Union’s centralist drive that gradually hollows national sovereignty and places it in supranational bodies, most specially the ECB, Mario Draghi’s ECB, that does no longer fear to antagonize its most important member, the Bundesbank. The ECB, that is also supposed to be the supervisor of ALL european banks, according to the latest proposal of the European Commission (EC), emerges as an almost all-powerful institution, mostly unaccountable to national governments and not even to the European Union. What and who does the ECB stand for?. Certainly not monetary orthodoxy and price stability as is written in its charter. In whose hands does Germany’s sovereignty lay? Perhaps a review of Mr. Mario Draghi’s biography would be helpful in answering this question.
As 54% of Germans Want Constitutional Court to Kill the ESM doubts about next wednesday’s resolution of the German Constitutional Court (GCC) increase in the financial community
Germans could be consigned to serfdom to save the Euro @ The Guardian In this article Mr. Gunnar Beck argues that the ISM might ruin Germany and leave the country in a sutuation of practical serfdom
“Don’t Count Your Hahnchen”: 40% Chance German Court Does Not Ratify ESM @ Zerohedge Even among the anglosaxon financial communtiy, doubts arise as to the resolution of the GCC on wednesday. A “yes” to the ESM no longer seems a done deal, according to Morgan Stanley
Are The Krimson Karlsruhe Knights About To Say Ni-en? @ Zerohedge Bank of America, Berenberg and Daiwa Capital also have some doubts about the GCC`s resolution
Five Years Since The Great Financial Crisis: “No Growth, No Deleveraging” @ Zerohedge It illustrates the lack of debt deleveraging in developed economies from 2007 until now
Diverging like it is 1929 @ Safehaven Interesting comparison of the divergence of market action and fundamentals today and in 1929
The Repricing of Oil @ Peak Prosperity It shows the fragility of the supply/demand balance in the oil market and how the present worldwide recessionary conditions mask the latent scarcity of oil, limiting the scope of price decreases and showing the potential for big price increases in a not too distant future
On Vimeo, Kogonada publishes this video, homage to Stanley Kubrick
and the link https://vimeo.com/48425421
Yesterday, the Democratic Party of the USA, in its democratic national convention, decided to reinstate in its party platform the assertion that Jerusalem is the capital of Israel, a highly controversial issue. This resolution of the Democratic Party is in opposition to the official diplomatic stance of the USA. It is specially remarkable the “democratic” process by which the motion was approved. The video enclosed in the article of Yahoo News is worth watching.
Today Die Welt publishes an article signed by Gunnar Beck, professor of EU law at the University of London. In it, Mr. Beck dissects the ESM treaty and proves that it clearly violates both Germany’s constitution and EU law. The ways in which the ESM violates german and/or EU law are the following:
- Unlimited capital. Germany’s constitutional court made clear in past resolutions that any increase in the financial responsibility of Germany arising from EU rescues of weak european countries should be explicitly voted in the german parliament, who would have the right to oppose any additional financial burden. According to the authorized capital of the ESM, 700 billion Euros, Germany’s part would be capped at 190 billion Euros (in proportion to its share of the Eurozone’s GDP) . This would be the case if the ESM treaty did not allow for its shares to be issued at values other than par. While this is true for the first 80 billion of capital, according to article 8.2, subsequent capital issuance can be done at values other than par. This means that, in practice, capital can be as high as the governors of the ESM decide it to be. The only thing they need in order to increase capital above the 700 billion limit is to issue shares of the ESM at a higher than par value. For instance, the ESM could issue 1 million shares at a premium of 100% to its 100000€ par value, that is, 200 billion Euros of capital would be obtained, but only 100 billion of those would count towards the capital limit rule. This way, effective capital could be as high as approved by the governors of the ESM, without breaking the 700 billion authorized capital rule.
- “Eurobonds”. Article 21 of the ESM treaty allows the issuance of unlimited amounts of debt in financial markets, introducing “eurobonds” through the back door.
- Joint and Several Liability. In the event that one of the signing countries was unable to pay for its share of capital to the ESM, the remaining countries would be responsible for the amount not being paid by the country unable to fund the ESM. In practice this means that rich countries might be responsible not only for their part, but for that of the countries unable to pay.
- Bank license. According to article 32.9 the ESM needs no banking license to lend money in markets. Also, as “bad bank” the ESM can finance itself at the ECB. Finally, according to article 19, the ESM has the authority to rescue insolvent banks. A true bank in everything but name.
- Immunity. According to article 35, ESM governors have legal immunity against any decisions taken by them in the ESM. Also, resolutions by the ESM can not be revoked by any judicial means.
- Secrecy. According to article 34, members of the ESM have a lifelong obligation of confidentiality on matters related with the ESM.
A complete assessment of the laws broken or superseded by the ESM go well beyond the scope of this post, but it seems clear that the ESM, if approved, will permanently change the Eurozone’s financial architecture, diluting national sovereignty, making irreversible the subservience of Eurozone countries to an entity, the ESM, that nobody voted into power. What a feat! Cui Bono?