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Wednesday
Sep122012

The German Constitutional Court Torpedoes The ECB’s OMT

Contributed by Blankfiend, of Fibs and Waves.

The media and markets are falling all over themselves to celebrate the Karlsruhe court's acquiescence to the ESM and the Fiscal Pact.  The sense is that all of the building blocks are now falling into place for the establishment of a "Federation of European Nation States," European Commission President José Manuel Barroso's vague pipe-dream.  The Euro debt crisis is finally being definitively resolved.

But - did the justices really give up the ghost?  Has German budgetary sovereignty truly been handed over on a silver platter?  Will the ECB now be free to ride roughshod over the German taxpayer, putting theoretically "unlimited" amounts of their money on the line to buy Spanish, Italian, Portuguese, Irish, and French(?) bonds without the need for, or possibility of, their elected representatives legislative approval?!?

I think not!  Rather, it appears that the Court has laid a foundational argument for the reassertion of German fiscal sovereignty.   An escape hatch has been created by the Court to prevent the ECB from overextending German taxpayer risk without the consent of the government.

Consider these two direct quotes from the Court's decision.

"As a financial institution belonging to the public sector within the meaning of Article 3 of Council Regulation (EC) No 3603/93 of 13 December 1993 (OJ L 332 of 31 December 1993, p. 1), the European Stability Mechanism is one of the institutions specified in Article 123 (1) TFEU to which no loans may be granted. Due to its objectives, it is not covered by the exemption from the prohibition of monetary financing set out in Article 123 (2) TFEU. According to this provision, Article 123 (1) TFEU does not apply to publicly owned credit institutions. However, Article 123 (2) TFEU does not apply to institutions whose funds directly benefit European Union Member States because this would circumvent the prohibition set out in Article 123 (1) TFEU. This would be the case with the European Stability Mechanism. According to Article 3 (1) TESM, the purpose of the European Stability Mechanism is to provide stability support under strict conditionality to the benefit of ESM Members. It uses the funds at its disposal for direct financial stabilisation of its members, which the European Central Bank is prevented from doing by Article 123 (1) TFEU."



Obviously, the Court is asserting that the ESM cannot be levered via ECB loans.  However, perhaps more importantly, look what happens to the bolded sentence if we substitute OMT for ESM:

...the purpose of [Outright Monetary Transactions] is to provide stability support under strict conditionality to the benefit of [EMU] Members. It uses the funds at its disposal for direct financial stabilisation of its members, which the European Central Bank is prevented from doing by Article 123 (1) TFEU.

If that was not plain enough, consider the following sentence:

"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 (see also Recital 7 of Council Regulation (EC) No 3603/93 of 13 December 1993 (OJ L 332 of 31 December 1993, p. 1))."


Is that clear enough???
Hence, for what it's worth, the GCC clearly feels that the ECB is prohibited from SECONDARY market purchases aimed at financing EMU budgets independently of the capital markets.  Of course, the GCC has no jurisdiction over the ECB.  However, it certainly holds sway as to what Germany does and does not consent to regarding EU affairs.  Treaty breeches by the ECB appear to not be included.

Hence, our escape mechanism.  The Bundesbank now has sufficient cover to refuse involvement in OMT on the grounds that it violates the TFEU, should it so choose.

Jens - FOR GOD'S SAKE - DON'T QUIT!  STAY HEALTHY!  EAT YOUR SPINACH!

I don't hear this being spoken of in the media...

Cross-posted from Fibs and Waves.

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