On Friday morning the Germans threw the constitutional cat among the europhile pigeons by announcing that the ECB’s plan to save the bond markets of peripheral Europe, including Ireland, was unconstitutional. Yes, you read it right: any move by the ECB to save the euro by buying the bonds of over-leveraged peripheral countries was, according to the German constitutional court, against the German constitution.
Since 2012, when the ECB unveiled its ”solution to the euro’s debt crisis – which involved the Central Bank lending money to bust banks which in turn, lent this money to bust governments – the understanding all along (outside Germany) had been that ultimately ”Germany will pay. Or at the very least Germany will allow European Central Bank president Mario Draghi – the Italian – to do what Italians always do in a crisis: print money.
This promise of printing money – via the OMT (outright monetary transactions) – is the backstop that keeps the yields of European peripheral markets so low.
The promise is that Draghi would allow the ECB to buy government debt if no one else would buy these IOUs. The ECB would be the lender of last resort to leaky governments. In effect, Draghi promised to turn the euro into the Lira to save the euro, if needs be.
Whatever currency the Germans thought they were buying into by giving up the Deutsche Mark, it certainly wasn’t the lira.
But they wore this because German chancellor Angela Merkel needed to get hold of the euro crisis and show leadership (without actually showing leadership). Therefore, she allowed Draghi to go on a solo run and behave as if he was running the American Federal Reserve rather than what the Germans understood the ECB to be, a European version of their beloved Bundesbank. Merkel’s acquiescence gave Draghi the German ”permission to ease the euro crisis by suggesting that he would open his balance sheet and buy government bonds.
This didn’t go down well in Germany because it goes against the essence of the German monetary dogma, which is that governments can never again be financed by central banks. Money is immutable for Germans and is protected by law and treaties. For the Germans, money is a common good, like fresh air or a clean environment that has to be shielded by treaties.
This German obsession is all to do with hyperinflation, the little man with the moustache and all that stuff.
Historically, this is a country that was ruined politically, socially, militarily and financially by a man who believed and stated that ”treaties were little more than pieces of paper, and consequently, the post-war Federal Republic of Germany takes treaties very seriously.
When it signs treaties, it doesn’t expect them to be broken. And for the rest of us, we should know that when Germany signs treaties, it doesn’t expect to renegotiate them with the people who are co-signatories.
One of the treaties it signed was that the new ECB would never finance governments by buying government debt. This diktat comes directly from the Bundesbank – an institution set up by the Federal Republic of Germany to ensure their currency wouldn’t again be de-based, as it had been by the Reichsbank.
Another legacy of history was that never again would the political leadership of the country tear up the German constitution in order to suit its own ends. As a result, the constitutional court in Karlsruhe has an extremely important place in the functioning of the Federal Republic of Germany. It is more powerful than the cabinet, the Reichstag and the chancellor put together. It is the ultimate check that the private German citizen has over the public German government to protect the citizen.
It is interesting that the constitutional court and the Bundesbank are two sides of the same coin, one to protect the currency, the other to protect the constitution from democratically-elected politicians.
When Germans believe their government is not acting constitutionally, they go to Karlsruhe. Last year, a bunch of academics who were against OMT went to Karlsruhe and they contended that Draghi was acting against the German constitution because he was ultimately asking the German citizen to pay up for the IOUs of Italians, Irish, Greeks, Spaniards and the like. According to them, this was monetary financing through not just the back door, but right through the front door.
Last Friday, the court sided with the German people against its government and the ECB. It has made its ruling public, saying it considers the OMT programme ”incompatible with primary law because it ”does not appear to be covered by the mandate of the European Central Bank.
”There are important reasons to assume that it exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget, it said in a judgment posted on its website.
The ECB has responded with a tweet saying that it disagrees with Karlsruhe. In the meantime, the German court has passed the buck to the European Court of Justice (ECJ) to see whether OMT is consistent with European Treaty law. Clearly the Germans think not.
Is it likely that the ECJ will disagree with the ECB?
I have no idea really, but it would seem unlikely that the European institutions will not support each other over the Germans on this one.
What does it all mean?
Right now it puts into doubt any unorthodox moves being pulled out of Draghi’s bag of tricks. But it probably – counterintuitively – means much quicker moves towards a banking union in Europe. I maintain a counter consensus view because in my experience both working within the European institutions and outside in the financial markets, every time there is a crisis, it accelerates rather decelerates moves to further integration.
This is because the europhiles take each crisis to mean they must move more swiftly towards the ultimate goal rather than considering the crisis to be a moment for reflection. This is how dogmatic people behave.
To understand the way the europhiles work, consider the medieval church. What is the response to a heretic? Burn him and reiterate the dogma so that these ideas don’t take hold. In contrast, the British and Anglo/American bias regards each crisis as potentially spawning a monetary reformation in Europe, hoping a financial Martin Luther will emerge, democratically elected, to challenge the orthodoxy.
We’ve been waiting for such a character to emerge for a long time.
In the meantime, for Ireland, the German move must put the government’s slim hope of a retrospective bank deal, the so-called June 28 decision, in serious jeopardy. It also increases the real risk now of a collision between Germany and the EU over money. This understanding that Germany will go along with the plan willingly is now a dead constitutional duck. For europhiles that means forcing the Germans to do something against their will.
If you were a betting man or woman, who would you put your money on?
David McWilliams writes daily on international economics and finance at www.globalmacro360.com