Words ought to be a little wild, for they are the assault of thoughts on the unthinking
- J.M. Keynes

Wednesday, 12 September 2012

Constitutional Court was cool. Problem solved?

Another hopium shot went in as the German Constitutional Court kept the party going. 

Overall it is not a game changer. In fact by making sure that any increase in bailout bazooka's ammo has to be decided by the Bundestag, the Constitutional Court has made future bailouts more difficult. German public opinion isn't going to countenance any further cheque writing. Moreover, it is also going to make sure Germany continues imposing its austerity-led-growth policy. It's a slow burn. 

So Draghi's OMT is still the only line of defence. Now if only Rajoy would accept paramountcy.

On the judgement, looking past the headlines, some inferences (with the supporting judgement text below):

1. Joint liability has been ruled out. With a paid-in capital of €80bn this means headline firepower of €500bn is exaggerated unless one believes that peripherals guaranteeing to pay for each other’s and their own future bailout is credible.
Judgement 1: “…no provision of this Treaty may be interpreted in a way that establishes higher payment obligations for the Federal Republic of Germany without the agreement of the German representative”

2. Bundestag has to be kept informed. Alas, elected representatives who have to listen to ignorant public opinion will have to be told of technocratic decisions to sink great amounts of the public’s money into an undertaking of great advantage.
Judgement 2: “…the provisions…establishing the European Stability Mechanism do not stand in the way of the comprehensive information of the Bundestag and of the Bundesrat”

3. ESM cannot enhance its firepower without German approval. Just in case the ESM MD was thinking of doing a Draghi.
Paragraph 195: the relevant factor for adherence to the principles of democracy is whether the German Bundestag remains the place in which autonomous decisions on revenue and expenditure are made, including those with regard to international and European liabilities…If essential budget questions relating to revenue and expenditure were decided without the mandatory approval of the GermanBundestag, or if supranational legal obligations were created without a corresponding decision by free will of the Bundestag, parliament would find itself in the role of mere subsequent enforcement and could no longer exercise its overall budgetary responsibility as part of its right to decide on the budget.”

4. Germany still has oversight and controls the purse strings.
Paragraph 198: “…no permanent mechanisms may be created under international treaties which are tantamount to accepting liability for decisions by free will of other states, above all if they entail consequences which are hard to calculate. The Bundestag must individually approve every large-scale federal aid measure on the international or European Union level made in solidarity resulting in expenditure. Insofar as supranational agreements are entered into which by reason of their scale may be of structural significance for parliament’s right to decide on the budget, for example by giving guarantees the honouring of which may endanger budget autonomy, or by participation in equivalent financial safeguarding systems, not only every individual disposal requires the consent of the Bundestag; in addition it must be ensured that sufficient parliamentary influence shall continue to be made on the manner of dealing with the funds provided.”

5. But Monti and Rajoy can hope to repeat their ambuscade as Merkel has the power to loosen those purse strings (absent a backbench revolt).
Paragraph 201: “When examining whether the amount of payment obligations and commitments to accept liability will result in the Bundestag relinquishing its budget autonomy, the legislature has broad latitude of assessment, in particular with regard to the risk of the payment obligations and commitments to accept liability being called upon and with regard to the consequences then to be expected for the budget legislature's freedom to act; the Federal Constitutional Court must in principle respect this latitude. The same applies to the assessment of the future soundness of the Federal budget and the economic performance capacity of the Federal Republic of Germany, including the consideration of the consequences of alternative options of action.”

6. Banking license is certainly not going to happen. CC Monti
Paragraph 245: “It can be left open whether the European Stability Mechanism’s taking up of loans with the European Central Bank is already precluded by Article 21 (1) TESM, which merely provides for borrowing “on the capital markets”. As an internal agreement between European Union Member States, the Treaty establishing the European Stability Mechanism must at any rate be interpreted in conformity with European Union law. As borrowing by the European Stability Mechanism from the European Central Bank, alone or in connection with the depositing of government bonds, would be incompatible with European Union law, the Treaty can only be taken to mean that it does not permit such borrowing operations.

7. No enhancing firepower by leveraging off the ECB.
Paragraph 247: “A depositing of government bonds by the European Stability Mechanism with the European Central Bank as a security for loans would also infringe the ban on the direct acquisition of debt instruments of public entities. Here, it can remain open whether this would constitute a direct acquisition of debt instruments of state issuers on the primary market or whether after their intermediate acquisition by the European Stability Mechanism, it would be tantamount to an acquisition on the secondary market. For an acquisition of government bonds on the secondary market by the European Central Bank aiming at financing the Members’ budgets independently of the capital markets is prohibited as well, as it would circumvent the prohibition of monetary financing”

1 comment:

  1. The complete documentation about the decision of the German Constitutional Court: http://www.robertmwuner.de/verfassungsbeschwerden_esm.html