WEDNESDAY, JUNE 12, 2013
Wolf Richter: Germany Grapples (Again) With The Choice Between Its Constitution And The Euro
Yves here. The consensus view among experts, despite considerable public opposition in Germany, is that the German Constitutional Court will not upend the Eurozone bailout mechanisms by ruling in favor of challenges to their legality. This confirms the policy issue thatDani Rodrik flagged in 2007: you can’t have national sovereignity, democracy, and deep integration of markets at the same time. You can have at most two of the three. Sadly, Europe looks ready to settle on only one on that list.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.
There is nothing like the hearings in the hallowed and staid atmosphere of the German FederalConstitutional Court to bring out the knives … outside.
“It would behoove a Schäuble” – that’s German Finance Minister Wolfgang Schäuble – “not to act like the ECB had the status of the Holy See in the Eurozone,” said Sarah Wagenknecht, deputy chairperson of the Left Party. “Otherwise, a constitutional court could someday get the idea that we have to choose between the euro and our constitution.”
But that may ultimately be the choice. All major euro bailout programs get dragged before theConstitutional Court because they’re deemed to violate the provision in the constitution that gives budgetary powers to the Parliament, not to an unelected entity outside the country. And every time, the Court nods and imposes ever tighter limitations. This time, it’s the ECB’s money-printing and bond-buying programs – the very mechanisms that have kept the Eurozone from disintegrating.
For the two-day hearings, the antagonists are lined up around the block, so to speak, waiting for their turn to influence the history of the Eurozone. 37,000 plaintiffs are trying to get the Court to rule against these programs with which the ECB offered to buy crappy government bonds from teetering Eurozone countries to prop up their banks and bail out speculators.
Among the plaintiffs are individuals, politicians, and organizations across the political spectrum, making for some very unusual and normally irreconcilable bedfellows, including Bundesbank President and ECB board member Jens Weidmann, conservative MP and euro-skeptic firebrand Peter Gauweiler – these programs would turn the ECB into an “uncontrolled power,” he said – or anti-capitalist Sarah Wagenknecht whose Left Party had filed a complaint in order to, as she said, “change Merkel’s course of destruction.”
Plaintiffs fear that the ECB’s strategy would shuffle potentially huge losses onto the federal budget via Germany’s share of the ECB’s capital key, currently 27%. But if the crisis-struck countries were to become insolvent and exit the Eurozone, their portion of the losses would be redistributed over the remaining countries, and Germany’s exposure could rise to 43%. German taxpayers would need a lot of beer – or wine, in some regions – to wash that down. And it all could happen beyond any democratic processes and without parliamentary controls, in violation of the German constitution.
While the Court can’t tell the ECB what to do, it could prohibit the Bundesbank from participating in these programs, which would accelerate by a quantum leap the euro’s demise – or cause Germany to come up with a new constitution.
But Schäuble, when it was his turn, instead of slamming the ECB’s programs, or supporting them, took a different route. He told the Court that it didn’t have jurisdiction! The ECB wasn’t subject to the German constitution, he said. “I find it hard to imagine that German courts can rule on the legality of ECB actions,” he argued. “This would create the risk that the ECB would receive completely contradictory orders about the application of laws from numerous national constitutional courts in the Eurozone.” It would be legal mayhem.
A “dangerous error,” is what a riled-up Sarah Wagenknecht called Schäuble’s reasoning. She’d skewered the euro-bailout philosophy before. A year ago, during another outbreak of the bailout crisis, she’d complained, “They’re not saving the euro but the financial sector! Banks, insurance companies, hedge funds, and speculators are being ransomed.” Now she lashed out at Schäuble. He was playing with fire, she said; the German constitution did not guarantee the existence of the euro but of democracy….
Schäuble, perhaps unwittingly, had put his finger on yet another fatal structural flaw of the Eurozone: a nearly omnipotent central bank that could bail out speculators and banks and pile the resulting losses on taxpayers of other countries, no questions asked, whenever it felt like it, to whatever extent it deemed necessary – “to save the euro,” as it were. That’s its religion, its raison d’être. An act of institutional self-preservation. And if a constitution needs to be sacrificed along the way, so be it.
But in theory, the Court could throw a monkey-wrench into the efforts to keep the Eurozone duct-taped together; it could rule against the ECB’s money-printing and bond-buying mechanisms that would create, in Gauweiler’s words, a “brave new Huxley-world of the unlimited debt,” a world where “money is no longer earned but printed.” Read…. The ECB’s Forked-Tongue Policy To Save The Euro
http://globaleconomicanalysis.blogspot.com/2013/06/german-constitutional-court-to-rule-on.html
Tuesday, June 11, 2013 12:11 PM
German Constitutional Court to Rule Whether ECB Actions Violate German Law; Irrelevant Arguments and Outright Lies; Dangerous Games
The German Constitutional Court in Karlsruhe, heard arguments on Tuesday on whether ECB measures to contain the eurozone crisis violate German law.
The court does not have the power to block the ECB, but it does have the power to restrict German participation in various funding schemes.
The New York Times dramatically states German Court Debates Fate of Euro.
The court does not have the power to block the ECB, but it does have the power to restrict German participation in various funding schemes.
The New York Times dramatically states German Court Debates Fate of Euro.
Karl Albrecht Schachtschneider, a retired law professor and well-known euro opponent, told the court he hoped that “the euro adventure will be brought to an end for the good of Germany and the good of Europe.”Irrelevant Arguments and Outright Lies
On the opposite side, Wolfgang Schäuble, the German finance minister, warned that the cost to Germany would be incalculable if the country left the currency union. And he pointed out that under the European Central Bank, inflation has been lower than it was with the deutsche mark. “The E.C.B. is acting within its mandate,” he told the court.
Mr. Schäuble said the central bank could be put into an impossible position if it were faced with conflicting rulings by courts in different euro zone countries.
The hearing, in a fenced-off court and police complex in a wooded area outside Karlsruhe, a city in southwest Germany near the border with France, drew an eclectic group of Germans on both the left and right who deride the euro as a travesty and long to bring back the deutsche mark. Outside a security checkpoint, several dozen anti-euro protesters chanted and waved signs. One sign called for Jörg Asmussen, a German arguing on behalf of the E.C.B. in the hearings, to be thrown in jail, an indication of the emotion that some Germans attach to the issue.
Mr. Asmussen, a member of the E.C.B.'s Executive Board, and Jens Weidmann, president of the Bundesbank, were expected to argue opposite sides of the question later in the hearings, which continue through Wednesday.
Mr. Weidmann is expected to repeat his counterposition, often expressed in speeches and interviews, that buying such bonds would violate a prohibition against using the euro zone’s central bank to finance governments.
The objections raised by the opponents of European Central Bank action tended to follow a similar set of themes. The central bank’s policies, they said, will evolve into a means to transfer German wealth to Greece, Italy and other European Union countries against the will of the German people. E.C.B. policies will save banks at the expense of ordinary citizens, complainants argued.
- Schäuble said "the central bank could be put into an impossible position if it were faced with conflicting rulings by courts in different euro zone countries." So what? That is not the problem of the court.
- Schäuble said inflation was lower under ECB mandate. Once again that has nothing to do with the legality of the issues at hand.
- Schäuble warned that the cost to Germany would be incalculable if the country left the currency union. That comment is disingenuous at best. It ignores the huge potential costs to Germany if Germany stays in the eurozone. Regardless, the argument about costs of a breakup are irrelevant.
There is only one issue in this case that is relevant: Do any ECB actions or proposals violate a German constitutional prohibition against using the euro zone’s central bank to finance governments?
I am certain they do. Whether the court pushes the line one more time is the only issue in doubt. I suspect they will, again, with still more wishy-washy language regarding where the line in the sand is.
You can see a strong hint of that possibility as the Times points out "questions [by the judges] suggest the court might rule on narrow grounds, arguing that at least some aspects of the complaints were premature".
Dangerous Game
Spiegel Online Guest Commentary by Peter Bofinger says ECB Case at High Court: The Bundesbank Is Playing a Dangerous Game
With its opposition to the ECB's bond-buying policy, the German central bank is pursuing a risky strategy that may stem in part from a desire to enhance its own power.Mud Slinging
The Bundesbank concedes that the purchase of bonds by central banks is a common practice, but notes that in the case of the United States, Japan or the United Kingdom, central banks only buy bonds of high creditworthiness. The ECB, by contrast, plans to buy bonds of "poorly rated member states" in order to reduce their high-risk premiums, writes the Bundesbank.
In doing so, Bundesbank officials are deliberately ignoring the fact that the budget deficits and debt levels of the aforementioned three countries are in some cases considerably higher than in the crisis-hit nations of the euro zone. The "high creditworthiness" doesn't reflect budgetary discipline there. Rather, it stems purely from the fact that the central banks in question opted for large-scale bond buying to give a clear signal to market participants: the US, Japan and the UK will never suffer a liquidity problem in the bond markets.
All the euro proponents can do is throw mud and hope some of it sticks. It's quite a stretch of the imagination to propose the Bundesbank purpose is to "enhance its own power".
Regardless, "why" Jens Weidmann, president of the Bundesbank, has pursued this action is of course irrelevant. The only question at hand is whether or not ECB actions violate the German constitution.
Two-Faced Presentation
Finally, I would like to point out the blatant two-faced nature of euro proponent arguments. On one hand they want the court to believe ECB actions will be limited, and on the other hand they want the ECB to do anything and everything (including buying outright junk) in a "whatever it takes" approach, regardless of the risks to German taxpayers, and regardless of constitutional issues.
The end clearly justifies the means for euro proponents.
And here's the irony: The true "dangerous game" comes when populists seek to ignore constitutional issues for the sake of convenience. Nothing good ever comes from such actions.
Mike "Mish" Shedlock
and.....
http://www.zerohedge.com/news/2013-06-11/they-just-learned-omt-still-has-no-legal-term-sheet
They Just Learned The OMT Still Has No Legal Term Sheet
Moments ago, the following headline hit the tape:
- ASMUSSEN SAYS ECB HASN'T SEEN NEED TO PUBLISH OMT LEGAL TEXT
That's right: the ECB is trying to get the German Constitutional court to pass the OMT (i.e., On Merkel's Tab) bond purchasing program, and yet there still is no legal term sheet.
The photo below captures the reaction by the Karlsruhe Kardinals upon hearing this unmitigated idiocy.
http://www.guardian.co.uk/business/2013/jun/11/eurozone-crisis-switzerland-german-court-uk
Asmussen takes the stand
Jörg Asmussen, Germany's representative on the European Central Bank's governing council, is now giving evidence to the German constitutional court in Karlsruhe.
Asmussen is telling judges that the ECB hasn't yet seen the need to publish the legal text surrounding OMT, but would certainly do so before allowing any country to join the programme.
The legal framework behind OMT is something of a mystery. A few months back, Mario Draghi revealed that it was still a work in progress. Last week, though, he suggested it was all-but ready for publication.
Schäuble defends ECB
Germany's finance minister Wolfgang Schäuble has defended the ECB's bond-buying programme as the German constitutional court's eagerly awaited hearing got into full swing.
Schäuble told judges in Karlsruhe that he is confident that the ECB is acting within its mandate by offering to buy "unlimited" quantities of peripheral bonds from countries who also agree to a reform programme.
He said:
The German government sees no signs that the measures taken by the ECB so far violate its mandate.
Schäuble also warned judges that rejection of the OMT could lead to Germany leaving the eurozone, with "unforeseeable' consequences. He also said he didn't believe the ECB's measures fell within the remit of the German courts.
However, as the FT's Michael Steen flags up, Schäuble did add one reservation – as OMT hasn't actually been deployed yet, so he's only working off Mario Draghi's statements.
http://www.zerohedge.com/news/2013-06-11/press-preview-german-constitutional-court-decision
Press Preview Of German Constitutional Court Decision
- Borrowing Costs
- Central Banks
- default
- European Central Bank
- Germany
- Monetary Policy
- Newspaper
- Sovereign Default
Starting today, and continuing through tomorrow, the German Federal Constitutional Court (FCC) will consider the legality and conformability of the European Stability Mechanism (ESM) and the ECB’s Outright Monetary Transaction programme (OMT) in particular. What does the press expect will be the outcome of the FCC's deliberations (spoiler alert: nobody will dare to threaten Deutsche Bank's towering mountain of derivatives, all $56 trillion of them, but let's pretend it is exciting). Here is a brief recap via Bruegel Think Tank.
On 11 and 12 June, 2013 the German Federal Constitutional Court (FCC) will once again debate and consider the legality and conformability of the European Stability Mechanism (ESM) in general and the ECB’s Outright Monetary Transaction programme (OMT) in particular. In September last year, the court preliminarily approved the ESM on condition that German financial liabilities have to remain within the amount set by the German parliament (Court decision from September 2012 here). In the current hearing the FCC will consider several constitutional complaints (“Verfassungsbeschwerde”). According to the FCC’s press statement (here), the court will evaluate (1) scope and boundaries of the ECB’s monetary policy mandate, in particular the independence of the ECB and the OMT programme, (2) consequences of the OMT programme on the parliament’s budget right, (3) the role of the Bundesbank in the European System of Central Banks, and (4) possibilities of the parliament and the government react and respond to the ECB’s policies. The Court will invoke a joint assessment of whether or not the ECB acts ultra-vires and violates Germany’s constitutional identify.
The focus of this hearing will be on the ECB’s rescue policies and specifically whether or not the ECB’s OMT is indirectly circumventing the prohibition of financing euro zone countries’ budgets. While the programme eases borrowing costs of struggling states, critics stress that it also eases pressure on governments to reform their fiscal policies and render the independent central bank dependent on governments’ policy choices. The ECB argues that its primary goal to safeguard price stability has to be accompanied by secondary goals, in particular maintaining the stability of financial markets. The Bundesbank, by contrast, argues that OMT exceeds the boundaries set by the ECB’s mandate. In December last year, a statement by the Bundesbank in which the ECB’s OMT program is criticised was leaked and published by Handelsblatt.
The case is receiving wide coverage in the German press. The Welt writes that it is unlikely that the Court will deviate from its previous stance regarding the ESM, but that the constitutional complaints regarding the ECB’s OMT programme are a more delicate matter. The newspaper considers four potential decision scenarios: (1) The complaint is not admissible because the ECB is not subject to German but EU law and, hence, only the European Court of Justice (ECJ) has the competence to rule on the ECB’s policy. This scenario, however, is deemed highly unlikely because the FCC has already raised concerns that OMT might indirectly finance government deficits and because of the detailed structure of the hearing itself. (2) If the Court were to decide that the ECB is acting beyond its mandate, the ECB’s policies will no longer be covered by the German consent to EU treaties and OMT will violate German basic law. Such a decision, however, would necessitate the involvement of the ECJ, which in the past has always adopted a pro-European stance. But thus far the FCC has never referred a case to the ECJ. In extremis, the court may force the German government to complain against the OMT at the ECJ. (3) The FCC might consider ECB policies at odds with German basic law because they deprive the Bundestag of its budget right. In the eyes of the Handelsblatt such a verdict also seems unlikely because it is solely based on German law and therefore non-binding for the ECB and would essentially prohibit Germany’s participation in the common monetary policy. (4) Finally, the most likely outcome is that the FCC will turn down the appeal but still raise doubts and scepticism about OMT. Such a decision could potentially curb the scope of the programme and strengthen its critics in the Governing Council, most notably Bundesbank president Weidmann.
The Handelsblatt recently analysed the Bundesbank’s criticisms of the ECB’s policy. The Bundesbank’s main points of criticism are that the ECB’s Governing Council is not subject to parliamentary oversight and therefore should not be allowed to reach decisions that will lead to Germany having to take over financial liabilities. Stabilisation policies should rather be enacted through the ESM, while the ECB should restrict itself to the conduct of monetary policy. OMT also overstretches the ECB’s mandate of safeguarding price stability by supporting fiscal policies of heavily indebted countries and thereby threatening its institutional independence. While the ECB argues that OMT will also align interest rates across the euro zone and thereby keep monetary policy effective, the Bundesbank dismisses this justification because diverging level of interest rates across the euro zone only reflect different levels of economic strengths in the respective countries. Overall the Handelsblatt is confident that in the end the FCC will conditionally approve of the ECB’s rescue policies.
The Welt further quotes the German law professor Christoph Schalast who suggests that it seems unlikely that the FCC will stop the OMT and the complaint is rather “an act of despair of Euro sceptics”. Another law professor, Joachim Wieland, said that “if the FCC would rule that OMT is beyond the ECB’s mandate, not only the common monetary policy, but also the EU would be finished.” While most German law experts believe that OMT is at least problematic, they also share the view that the FCC will shy away from bluntly accusing the ECB of violating EU and German law. Still, according to the FAZ Udo Di Fabio, a former constitutional judge and professor of constitutional law, argues in a statement for the Stiftung Familienunternehmen, an interest group of family-owned companies, that if the ECB is indeed indirectly financing governments’ budget deficits through OMT, the FCC ultimately has to obligate the German government and the parliament to leave the euro zone should recommendations to change policies of the main German political institutions (“Einwirkungsaufträge”) remain unsuccessful. Other measures according to Di Fabio contain changes in the basic law as well as rules for a structured sovereign default in order to strengthen national governments’ fiscal responsibilities.
Most German newspapers, for example FAZ andHandelsblatt, portray the hearing before the FCC as a showdown between the Bundesbank and the ECB, where two Germans, Jörg Asmussen of the ECB and Jens Weidmann of the Bundesbank will defend the opposing views of the institutions they are representing. Asmussen and Weidmann shared a trust- and respectful working relationship due to their prior jobs, when Asmussen was working for the finance ministry and Weidmann for chancellor Merkel as an economic advisor. Regarding the ECB’s rescue policies, however, both now share diametrically opposed views. Mario Draghi’s choice to send Asmussen to justify the ECB’s policy instead of Yves Mersch, who was previously considered to testify before the Court, also reflects Asmussen’s knowledge of the Court’s procedures and peculiarities. Some members of the governing coalition, however, would still like to see Draghi testify before the Court. According to the FAZ, Rainer Brüderle, vice chairman of the Liberal parliamentary group (FDP) in the Bundestag and front runner for the party in the upcoming national elections, wrote a letter to Draghi requesting that he himself instead of Asmussen should testify before the FCC; the importance of the matter subject would require his attendance.
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