Auf wiedersehen, sovereignty?

September 11, 2012 | Capital markets, Central bankers, Democracy, Euro, Global news, Grexit

By:David A. Smith


As we saw yesterday, using raw material from the New York Times (September 7, 2012) and Wall Street Journal (September 6) (blue font), the European Central Bank has announced it will prop up questionable debts in the southern-zone countries before they go bad:


The new ECB program, called Outright Monetary Transactions, or OMT, will purchase government bonds and focus on maturities from one to three years.


Enter the Draghi


Oh, and One More Thing:


The ECB will set no limit on how much it buys and won’t claim senior creditor status, meaning the bank won’t seek to be repaid ahead of other investors in the event of a restructuring.


Yesterday’s post spelled out why I think this is stupendously foolish political economics – but more relevant, and more urgent, is that if this stands legally (and it may not), then Germany can bid auf wiedersehen to its national sovereignty, as can every other nation in the Euro zone.


Frankfurt — The European Central Bank, acknowledging that Europe’s debt crisis has reached a critical stage, said it was prepared to use its most powerful tool—its printing press—to save the euro.


You just grasp their principal … and squeeze


If so, this makes Germany (and every other nation, like Spain) a sub-sovereign state to the greater Europe, and Mario Draghi its unelected president.


First and foremost, even the part of Draghi’s speech designed for headline quotation begins with an awkward phrase. “Under appropriate circumstances…” the bond-buying will happen, the principal circumstance being that Spain – the largest country closest to default – requests an official bail-out and accepts all the related conditions. That will mean signing a “Memorandum of Understanding” involving a major loss of sovereignty and extra fiscal austerity, to be policed by both the ECB and International Monetary Fund.


If so, this makes Germany a sub-sovereign state to the greater Europe, and Mario Draghi its largely unelected president.  And that body then decided, in simple terms, to expropriate money from German taxpayers:


Underscoring the historic dimension of the move, the ECB’s 22-member governing council took the decision over loud objections of the Bundesbank, the German central bank on which the ECB was modeled.


You see, Germany, 21 of us have decided to raid your wallet because that will be better for us, so why don’t you just go along?


From each nation according to its ability, to each according to its needs.”  Haven’t we heard that somewhere before?


Poetic justice that we were Germans and our statue’s in Berlin, don’t you think, Karl?



Bundesbank officials have repeatedly railed against bond-market intervention, warning that the central bank is effectively printing money.


As we saw yesterday, the ECB is printing money.


Germany, because of its size and share of the ECB’s liabilities, would have the most to lose.


Germany has the most to lose because Germany is solvent, unlike 21 of its neighbors and fellow club members.



Germans have long been skeptical of handing control of the euro to a central banker from Italy, given the country’s pre-euro history of high inflation and volatile currency swings.


Soon we’ll be making kites out of Euros?


So far, Mr. Draghi appears to have the support of the German government. Both Chancellor Angela Merkel and Finance Minister Wolfgang Schauble have voiced support for the ECB president.


The evidence is mounting that Chancellor Merkel is a conciliator without much of a compass, who does not understand finance.


Appearing with Prime Minister Mariano Rajoy of Spain in Madrid, Ms. Merkel said Thursday that the ECB, in approving the bond-buying plan, was “acting with independence and within the framework of its mandate.”


Okay, Chancellor, let me take you through the basics yet again


I wonder, though, whether in fact Minister Schauble will endorse this latest escapade.


That was before this latest about-face


But that support may prove short-lived if the intervention doesn’t yield quick results.


The Bundesbank quickly denounced Thursday’s decision, highlighting a deepening rift between the ECB and its largest member. Bundesbank President Jens Weidmann views buying bonds as “tantamount to financing governments by printing bank notes,” a Bundesbank representative said.


He’s right, though that will be no consolation.


Yes, that will be no consolation.  We are so screwed.


Now that it has been announced, Minister Weidmann will probably still keep trying to scuttle it, as did his predecessor, Axel Weber, two years ago:


In May, 2010, the central bank started buying Greek, Spanish and Portuguese bonds, spending €16.5 billion in the first week.


Germany’s top central banker at the time, former Bundesbank President Axel Weber, announced his opposition to the plan just hours after it was unveiled. Mr. Weber resigned from the Bundesbank and ECB board less than a year later over the bond purchases.


In effect, the Eurozone’s leaders have handed over their checkbook to administrators who will be looking to keep the big Euro club going at any price (“The Euro is irreversible,” said Mr. Draghi in announcing this latest last chance).


The ECB will set no limit on how much it buys and won’t claim senior creditor status, meaning the bank won’t seek to be repaid ahead of other investors in the event of a restructuring.


It’s a subsidy, pure and simple, though nobody knows how much subsidy will be required. 


“The size is going to be adequate to reach our objectives,” Mr. Draghi said.


As one Italian to another, Mario, mine’s size is going to be adequate to reach my objectives, too


Meanwhile, the IMF (currently headed by a Frenchwoman) seems willing to fund the ECB, so long as it’s the ECB, not the IMF, buying the bad paper.


“We strongly welcome the ECB’s new framework,” IMF managing director Christine Lagarde said in a statement. “The IMF stands ready to cooperate within our frameworks.”


Why not?  It’s not her risk.


Seeking the IMF’s participation is critical to maintaining German political support for Mr. Draghi’s initiative. 


Greek bonds.  Very dangerous. <Pause>  You go first.


Berlin insisted on IMF involvement in rescues of Greece, Ireland and Portugal and values the IMF’s technical expertise.


That was based on the assumption the IMF would be a cautious underwriter, instead of a know-nothing bystander and enabler.


However, IMF involvement could weaken the incentive for Spain and others to sign up for aid, given the strict conditions it would likely demand.


The IMF and ECB can demand all the conditions in the world, and the governments of Spain, Greece, Italy, or wherever can choose to say Yes, but unless the ECB then marches in with an occupying force, their sole remedy for non-performance is to cut off further financing – which, as we saw yesterday, is a hollow threat.


Might as well stamp that on the contracts


Members of her coalition partner, the pro-business Free Democrats, and opposition parties condemned the plan.


Frank Schaffler, an expert for financial affairs for the Free Democrats, called for charges against the bank before the European Court of Justice.


What are laws for, if not enforceable in courts?


Mr. Schaffler has been arguing for two years that the ECB’s actions violate the German Constitution.


“What happened yesterday has historical dimensions,” he said in an interview Friday with Deutschlandradio for Berlin.


He’s right; if it holds, bye-bye Germany sovereignty.  If that happens, then Minister Weidmann will probably resign, rather than watching the debtors keep printing carti bianchi:


Looks like money, and we can keep printing it


But the ECB’s action may not hold – it could be invalidated by the German Constitutional Court.  In September, the court approved the previous bailout, but “also said Ms Merkel’s government needs to seek permission from parliament when taking on further financial burdens in Europe,” which of course the Chancellor has not done.


More immediate challenges include a ruling by the German constitutional court next Wednesday [September 12, 2012 – Ed.] on whether the euro zone’s new bailout fund, the European Stability Mechanism, is in line with Germany’s constitution, and elections the same day in the Netherlands, where voters appear critical of euro zone bailouts.


Facing a big decision: the Germany’s Constitutional Court


The ballot box or the courts: when Europe’s leaders do not let voters use the former, Europe’s citizens are left hoping for respect for law from the latter.


Dutch election candidates: if the ECB prevails, will they have any power left?



Comment from Matthew D Healy
Date: September 11, 2012, 10:05 pm

I wonder if some of the Euro’s architects were secretly expecting sooner or later the fundamental mismatch of a currency union without a true political union would become obvious — and thus force a deeper political union. If so, I fear they may have underestimated the depth of cultural differences. In the US people routinely move hundreds or thousands of miles for education or jobs, but it’s a lot harder for somebody from Greece or Spain to go work in Germany than it is for somebody from Wisconsin (where I grew up) to go work in Texas or Connecticut (two of the eight States where I have resided).

Comment from David Smith
Date: September 12, 2012, 10:41 am

Yep, I think that was the plan: heads the currency works and brings people together, tails the currency doesn’t work so people have to come together. But cultural/ linguistic barriers, labor immobility, and the insolvency of their social-welfare states are combining to make both very difficult.