The Choice Before the German Constitutional Court

As anyone who reads this blog knows, last week saw the hearings regarding OMT before the German Constitutional Court (BVG) in Karlsruhe.  In coming weeks to months, we can expect some type of decision from the court regarding the matter.  But, what might that decision be?

Firstly, we must understand exactly what the question is before the Court.  I would frame it this way:

Is OMT a violation of Article 88 of the German Constitution, which allows the Bundesbank to transfer its powers to the ECB, as long as the ECB is “independent and committed to the overriding goal of assuring price stability”? 

Framed this way, we see that the BVG is NOT ruling on whether OMT is or is not a violation of EU level treaties.  Rather, it is restricting itself to matters pertaining directly to the German Constitution.  For both of these reasons, it seems unlikely that the case will be either punted to the European Court of Justice or dismissed for lack of competency.

While I will not discuss the merits of the case, I would propose that the answer to the question of constitutionality is a binary one.  If the BVG finds no constitutional issue, then they really have little more to say regarding the matter.  Questions regarding violations of Article 123 TFEU would have to be raised at the ECJ level as a separate matter.  On the other hand, if the BVG does find that OMT credibly threatens either the goal of price stability or the independence of the central bank, as Weidmann asserts, then the only appropriate ruling is to forbid Bundesbank participation in OMT pending a change to the German Constitution.

I would add one important caveat.  During the hearings, Asmussen was told by one of the judges that if the ECB were to take losses on its OMT portfolio, that would constitute central bank financing of sovereign governments.  Hence, a potential outcome would be for the BVG to allow OMT under the condition that the Bundesbank bear no losses on its portfolio.  This would, of course, negate Draghi’s promise of the ECB being pari passu to other investors, and make OMT much more like the old Securities Markets Program, in which ECB buying was essentially a poison pill for other less senior buyers.

Vier Szenarien für das EZB-Urteil aus Karlsruhe (Die Welt - in German)

Consensus Expectations are for a "Durchwinken"

Durchwinken is a German word combining "durch," which means through, with "winken," which means to wave.  Put together, the word means a wave-through, and describes the consensus for what the German Constitutional Court will do in its upcoming June 11-12 hearings regarding OMT.  From a Handelsblatt article,

"Erwartet wird jedoch, dass die Verfassungsrichter die Rettungspolitik unter Auflagen durchwinken warden."

"However, expectations are that the Court will wave-through the Rescue Policy with stipulations."

That same article also tells us that Jens Weidmann will appear before the Court on behalf of the Bundesbank, which we already knew.  Appearing for the ECB will be Joerg Asmussen, a German member of the ECB's Executive Board.



Weidmann vs. Asmussen
Deutsch-deutsches Duell vor dem Verfassungsgericht


A second article I found in Frankfurter Allgemeine Zeitung. This article has more meat to it, and my Blankfiendian translation follows:

The euro rescue policy in court

 24.05.2013 · The struggle to stabilize the Euro goes to the next round: the venue is the hearing before the Federal Constitutional Court . Jens Weidmann will speak for the Bundesbank, he could take on the German ECB Director Joerg Asmussen.

By STEFAN RUHKAMP

The forthcoming June 11th hearing before the Federal Constitutional Court regarding the process of stabilizing the euro will be a matter for the bosses of the Bundesbank and the European Central Bank to explain.   ECB President Mario Draghi will indeed probably not appear, but he recognizes the importance of the decision.    Yet, the ECB had not disclosed who will speak for them if the judges want to know more details about the stabilization fund ESM, the bond purchase program of the Central Bank, emergency loans and the huge balances in the Target payment system. According to initial reports, ECB director Yves Mersch of Luxembourg would explain the position of the ECB.   But on Thursday evening, it was said that the ECB's German director Jörg Asmussen will speak in Karlsruhe for the central bank.   The critical stance of the Bundesbank will be presented by its President Jens Weidmann.

Meanwhile, Mario Draghi, it is heard, has held conversations with former judges of the Federal Constitutional Court regarding the peculiarities of Germany's highest court and its players. For the ECB, the hearing is of great importance because the later ruling could curtail its room to maneuver. It will get down to brass tacks: Weidmann will explain why the Bundesbank assesses the bond purchase program (OMT) in particular as an over-stretching of the ECB's mandate. In a previously written opinion from December, the Bundesbank stated that the independence of the ECB is at risk and the risks are increasing, as in the case of using the program for targeted buying of poor quality bonds. Meanwhile, in Ireland a debt swap between the government and the central bank has occurred.   Since then, the government funded a debt that is equal to 20 percent of Ireland's GDP via its central bank at the benchmark rate. (see http://www.bloomberg.com/news/2013-03-19/ireland-said-to-tap-secret-ecb-pact-for-anglo-irish-bond-swap.html and http://acelg.blogactiv.eu/2013/02/14/the-irish-debt-swap-a-promising-deal/ ) Not only at the Bundesbank, but also at other European National Central Banks, this has been regarded as one of the touchiest operations in the rescue effort.

Also, for countries in whose favor the OMT program could be expected to intervene, the Bundesbank holds that the conditionality of the credit requirements promised by the ECB would be unsustainable.  Once an intervention is made even once, the program will be barely stoppable.   In addition, the Bundesbank questions the motive provided for the intervention: It is not the task of the central bank to ensure the cohesion of the monetary union. This particular argument has been poorly received by the ECB.   In the last few days, what followed were behind the scenes insinuations that there were opponents of the euro at the Bundesbank.

 

Karlsruhe will not have to deal directly with questions of European law

The ECB's opinion, written by the German legal scholar Frank Schorkopf, focuses on the question of whether the contemplated bond purchases are legally allowed.   He argues that the ECB, in addition to their primary objective of price stability, should pursue secondary objectives, such as securing financial stability. The statements about the irreversibility of the euro, with which the OMT program is justified, are not an unauthorized addition. The irreversibility of the euro will not be guaranteed at the expense of price stability. "The credibility of the irreversibility is rather an important prerequisite for achieving price stability," reads the statement.

“What to expect in Karlsruhe, then?” the central bankers ask themselves. As the Supreme Court will not deal directly with questions of European law, it is considered likely that it will declare it has no jurisdiction regarding many of the points in the case. Thus it is unlikely that there would be a statement that the ECB’s OMT buying program infringes upon European law. Also, the finding of an infringement of the German constitutional law is considered unlikely.   At the same time, the judges will, as in previous proceedings, probably avoid referring the case to the European Court - where there would likely be expected a sympathetic attitude towards the rescue policy. Conceivably, there could be exhortations to the government and the parliament, to continue to keep monetary policy in focus, and to ensure that national sovereignty is not violated.

But even if it did not come to such exhortations, critics of the rescue policies promise a damping effect from the Karlsruhe proceedings. Just the opinion of the ECB itself contains important information about the limits of monetary policy, these voices argue.  The ECB's opinion devotes considerable attention to the limits beyond which intervention is equated with illegal monetary state financing. For example, bonds should not be bought immediately after a new issuance in order to avoid circumventing the prohibition on the purchase in the primary market. In addition, the volume of government bonds with one to three years maturity –the program is constrained to buying in this spectrum – is explicitly limited.  In Spain, Ireland, Portugal and Italy, these bonds amounted to 524 billion euros. This is not to say that the ECB would strive for such a sum. Rather, it is interested in liquid markets, which would not be possible were it to buy up the whole stock.

What I find particularly interesting about this article are the comments that accompany it.  If you read the top ten most recommended comments, the predominant themes that come across are (1) sympathy for the Bundesbank's position, (2) an utter sense of predestined despair that any justice will be forthcoming from this hearing process before the Karlsruhe Court, and (3) a sense that the AfD (Alternative for Deutschland) may offer the only hope.

Also interesting is the rumor that Draghi has been speaking with former GCC justices.  I find this man to be much more of a politician than a central banker.  He is a snake in the grass if there ever was one.  As to Weidmann, I find him to be earnest and impassioned in his beliefs concerning OMT.  If he is ignored in Karlsruhe, as so many predict he will be, he truly should resign - publicly and loudly!

Anxiety Mounts over the German Constitutional Court OMT Decision

The German newspaper Bild Am Sonntag, among others, carries an interesting article which depicts growing anxiety within the ECB over the upcoming GCC hearings regarding OMT in mid-June.  Here is my Blankfiendian translation:
 
„In der Bundesbank gibt es echte Euro-Gegner“
 

"Berlin/Frankfurt – Anxiety mounts at the European Central Bank (ECB) over the upcoming decision of the Constitutional Court regarding the euro rescue package (ESM) - and rage at the Bundesbank.

Background: On June 11 the Karlsruhe Court will hold hearings concerning the ESM. By an express ruling, the judges had in September approved the ESM under certain conditions, but expressed great reservations that the unlimited purchases of the government bonds of euro crisis countries (e.g. Italy, Spain) would violate the strict prohibition against monetary state financing.

The mere ECB announcement that it would buy government bonds, indefinitely if necessary and under certain conditions, brought calm to the euro zone for a year – yet it remains controversial. Bundesbank Chief Jens Weidmann fears inflation, mounting debt, and a stalling of reforms.

In an opinion for the Court hearing, Weidmann has recently supported his criticism in sharp words - much to the annoyance of ECB chief Mario Draghi. His concern: If the Constitutional Court sets significant limits on the purchase program (known as "OMT"), or stops it completely, the euro crisis will erupt anew.

"There are real euro opponents in the Bundesbank", according to ECB circles. Behind the scenes, they exert pressure on the Constitutional Court.  The beneficiary States are bound to strict conditions for possible acquisitions.

Secretly, both sides expect the dispute to heat up.  Because the fact is: if it were up to Bundesbank Chief Weidmann, the Court would stop the ECB purchase program altogether."

The highlight in the last sentence of the article is not mine - it comes directly from the Bild website.

An article in the Frankfurter Allgemeine Zeitung entitled "EZB vermutet angeblich „Euro-Gegner“ in der Bundesbank" echoes a similar theme.  I will only give you my Blankfiendian translation of the last part of the article, as the first part is really almost lifted from Bild.

"Bundesbank already questioned arguments used by the ECB

ECB President Mario Draghi announced in the summer of last year, to intervene indefinitely, if necessary, in the face of rising bond yields in countries particularly affected by the euro crisis. He justified this by asserting that high interest rates for the crisis states were leading to even higher interest rates for businesses in those countries, among other things.

The German Bundesbank later questioned the arguments of the ECB in an opposing opinion submitted to the Federal Constitutional Court.  Even if higher interest rates for companies in crisis countries threatened, „it would not be for monetary policy to fight against this development, but the immediate consequence of the autonomous national fiscal policies".  Different market interest rates would not be inconsistent with the single monetary policy.  If national fiscal policy increases the risks in individual countries, and leads to higher interest rates for companies, the correction is no task for monetary policy.

Also the risk that a country could withdraw from the monetary union is not a justification for intervention by the central bank. For the question of such a fate lies solely in the hands of the sovereign state. The ECB could therefore make no such guarantees.  So far, the ECB has not bought any government bonds under the new OMT program (Outright Monetary Transactions) the Bundesbank refers to. However, in the markets, the program for countries in crisis has provided for relaxation.  Merely the announcement by the ECB pushed interest rates for worrisome euro countries, such as Spain and Italy, down."

 

I fully realize from the lack of comments lately that most of you think I am beating a dead horse, perserverating, playing a broken record, barking up the wrong tree... whatever.  However, I wonder if you have stopped to ponder the fundamental importance of this upcoming GCC decision.

Think about what the ECB really is.  It is the central bank of a currency union, and is composed of 17 National Central Banks - each representing independent sovereign governments.  It is not the Fed, the BoE, or the BoJ!  Its role, as envisioned in the TFEU, is to conduct monetary policy for the EMU with the primary objective of maintaining price stability.  It is to be independent, and it is expressly forbidden that it conduct the monetary financing of individual sovereigns.  It was certainly never envisioned that it would become the organization through which risk would be transferred between the taxpayers of individual sovereign member states.  Put in the current context, it is simply incredible that it will be the body which transfers Irish, Spanish, Italian - you name it - risk to the German taxpayer via the Bundesbank, particularly against the Bundesbank's wishes.

According to Draghi, that mandate for price stability can be used to justify doing "whatever it takes" to preserve the euro.  If such a broadened interpretation is accepted, then there is really just about nothing that the ECB could not do in a crisis.

Obviously, Weidmann and the Bundesbank disagree vehemently.  Saving the euro in its present form and/or preserving the current composition of the Eurozone are not the missions of monetary policy.  Those are political objectives, to be decided by democratic processes.

How the per-member-state, needs-based nature of OMT is not a violation of Article 123 TFEU - which expressly forbids the ECB's establishing credit facilities in favor of individual member states - is beyond me.  How the conditionality aspect of OMT purchases is not a violation of Article 88 of the German Constitution in that it so obviously compromises the independence of the Central Bank is also beyond me.  I've spoken of this many times before, and won't carry on again here.

This is the time when Germany gets to decide if it will take on the role of perpetual funding source for a transfer union.  It earlier foreswore the joint and several liability of Eurobonds and Stability Bonds.  Nevertheless, Draghi and his sixteen blood-sucking leeches have cleverly concocted a means to achieve the same ends with the OMT program - with no pesky democratic process to stand in their way. 

If the GCC does what it legally should - I daresay MUST - in this case, it would be a Cygnus atratus sighting if there ever was one...

Cygnus atratus

A Yield Starved Universe

I am convinced that the primary effect of extraordinary monetary policy measures such as QE revolves around the [inappropriate] re-pricing of risk assets.  The table below gives my assessment of the transformation this flood of liquidity has wrought on risk asset classes.

ASSET CLASS	WHAT WAS….	HAS NOW BECOME
Certificate of Deposit	A safe savings instrument	A waste of time
Treasuries, Bunds, OATS	A safe savings instrument	Certificate of Deposit
JGB’s	A safe savings instrument	A waste of time
Peripheral EU Sovereign Debt	Highly risky instruments, with large default premiums	Fully OMT-backstopped debt with attractive yields
High Grade Corporates	Low risk investment with attractive yield that allowed corporations to fund growth investment	Ridiculously cheap method for corporations to fund stock buy-backs at peak valuations
Junk Bonds	Risky instruments, with moderate default premiums	High Grade Corporates
Dividend Stocks	Risk instruments that paid you to own them	High Grade Corporates
Equities	Risk instruments with large potential gains or losses	The only way to make money

Sustainable?  I doubt it.

"A Lawsuit Against the ECB is Inevitable"

This is the title of a Handelsblatt opinion piece written by Jörg Uwe Hahn, a minister in the German state of Hesse, and a member of the FDP party.

The piece is in German, but the Google translation of it gets the message across adequately.  He proposes that the German government launch a lawsuit against the ECB's OMT program with the European Court of Justice, and discusses his reasons.  He also ponders the outcome of a GCC decision in June that would restrain the Bundesbank from participating in OMT, and thus require the ECB to bring suit at the ECJ.

Who knows at this point what will happen.  I will only say that whoever it is that allows the undemocratic ceding of the sovereignty of the German taxpayer to Draghi and his band of 16 leeches should be guilty of treason.

http://www.handelsblatt.com/meinung/gastbeitraege/gastbeitrag-eine-klage-gegen-die-ezb-ist-unausweichlich-seite-all/8176200-all.html

And here is an excerpt from a speech by the co-CEO of Saxo Bank, Lars Seier Christensen:

"And now, there is no way that the European populations are willing to move forward with the necessary further integration. Not that they get asked directly a lot, as almost all decisions are made by their parliaments or in Bruxelles behind closed doors, because no one dares to ask their populations via a referendum - they know the answer would be a resounding NO! And a NO it should rightly be, because Europe is not, and will never be, the United States. Our cultures, our economies, our populations are far too diverse to ever integrate efficiently and happily in a forced union.

Instead, integration is brought in via the back door, via contributions to the bailout mechanism, by corruption of the ECBs balance sheet, by the banking union that would destroy the credibility of even sound banks if fully implemented, by passing treaty changes quickly and uninformed via the parliaments, claiming that representational democracy justifies that. Well, it doesn't. A parliament that gives up national sovereignty knowing full well that their population would reject it, [is] are committing treason, in my view."

The entire speech is worth reading, and I agree with it wholeheartedly.

The ECB Defends OMT

Predictably enough, the ECB has leaked their own brief to the German Constitutional Court, as reported by Handlesblatt on April 29th.  The links are below, for anyone who cares to read it.

Handelsblatt Article

ECB Opinion (in German)

I have not read the 52 page document, but one of the highlights is that the ECB considers the preservation of the current EMU membership as part of its price stability mandate.  Of course, this differs wildly from the Bundesbank position, which sees this as a mission for the political authorities alone.

Of note, the German Federal government has wasted no time in throwing Weidmann and the Bundesbank under the bus.

Germany Doesn't Expect Constitutional Court To Block ECB's OMT

"The German government on Friday said the European Central Bank's OMT bond buying program is within the central bank's mandate.
The government's position is in contradiction with that of the Bundesbank, which warned in a statement to the German constitutional court that the OMT could compromise the independence of the ECB.
'We think that the ECB is acting within its mandate,' Finance Ministry spokesman Martin Kotthaus said at a regular government press conference here."

I have a question for my limited readership.  Are any of you from Germany?  If so, why did none of you point out this article from Handelsblatt, which is now over a week old and obviously related to other posts I have made recently?

Schäm dich!

As I Lay Dying

No, I'm fine, and this has nothing to do with William Faulkner either.  The title pertains to the statement by Angela Merkel proclaiming there would be no Eurobonds during her lifetime.  She reportedly made the comment in a conversation with members of the FDP party, who apparently then wished her a long life.

OMT clearly is a proxy for Eurobonds in that it represents joint and several liability.  With that conclusion in mind, and after reading the Bundesbank's brief to the German Constitutional Court, I was motivated to write the letter that follows to Dr. Weidmann:

30. 04. 2013

Dear Dr. Weidmann:

This is my second letter to you regarding the OMT issue.  I wrote to you in both English and German in October of 2012, and you were kind enough to reply.  In the interests of time, accuracy, and avoidance of self-embarrassment, this second letter will only be in English.

I have read the Bundesbank’s brief to the Bundesverfassungsgericht, dated December 2012 and released by Handelsblatt.  I find the reasoning compelling and completely agree that OMT is both a dire threat to the independence of the ECB and Eurosystem National Central Banks, and is an attempt to circumvent the prohibition on primary market bond purchases.  Should it actually be implemented, the objective of price level stability will, indeed, be sacrificed.

I would invite you to go one step further in your argument and explore exactly why the European debt markets have reacted so positively to the mere announcement of OMT.  Surely, it is not because of any substantial reform progress by the national governments concerned.  In fact, with the recent precipitous decline in borrowing costs, many of those very reform measures, as well as the targets embodied in the most recent iteration of the Stability and Growth Pact, are busily being delayed, discredited, or dismantled.

Rather, the markets correctly see OMT as a declaration of joint and several liability at the Eurozone level for the sovereign debt of the individual member states.  Put simply, the markets see OMT purchases as Eurobonds.  (They are actually riskier than Eurobonds, as they target the more dangerous economies of Europe and exclude the stronger ones.)  As you will recall, Eurobonds, and the concept of joint and several liability, is a notion which the Federal Government of Germany has already rejected in the strongest of terms.  I believe Chancellor Merkel’s words were allegedly to the effect of “not in my lifetime.”  The concept was also specifically rejected during the founding of the European Monetary Union.

With this background, how can the Bundesverfassungsgericht condone the imposition on Germany of joint and several liability via the bureaucratic fiat of unelected central bank bureaucrats when it has already been so forcefully rejected by the elected government?  This would seem a question worth posing in your testimony before the court in June.

I wish you much success and perseverance in your somewhat lonely efforts to avert having the unelected impose their will on the unwitting masses.

 

Make no mistake about it.  OMT is a topic Dr. Weidmann is PASSIONATE about.  The upcoming drama in the German Constitutional Court should be most interesting indeed.  It will reveal whether the German government is serious about avoiding open-ended joint and several liability for foreign sovereign debt, be that a choice made by democratic process or clever bureaucratic fiat.