February 10, 2014

Constitutional law and disorder

Posted in Banks · 50 comments ·

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

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  1. ps200306

    David, once the medieval church realised that they couldn’t burn all the Martin Luthers, they *did* actually sit down and reform at the Council of Trent. Admittedly, it took them 30 years to start it, and another 18 to conclude it, and they still spent a lot of time bitchin’ and whahnin’ about the heretics. But, reform they eventually did. Surely even the Germans can move a bit faster than that?

    • Eireannach

      The Germans citizens are right on this question of sound money. Mario Draghi and the money printers in The Fed. And BOE are behaving desperately to paper over deep structural cracks with cheap money. We saw what cheap money did to Ireland, surely we have learned something.

  2. Irish Lawmakers

    I salute the Germans for their self righteousness and self preservation of their Private Laws and their enactments and enforcement of Treaties that shield their Rights and Honour .

    Political Fudge will find itself in a hard place to move their national pride and self esteem .

    Why have similar Irish Laws failed to deliver either by enactment and enforcement ?

    Would the decision by Lenihan have been different had we then similar laws and how might we have succeeded ?

    In the meantime more Time will pass and that time can be an eternity for most Irish Taxpayers to wait for for a political enforcement either through the ECB or Bundsbank . Lost Time is Lost Opportunity.

  3. Alan42

    Doom and gloom. Ireland is on the road to recovery. Property is recovering and the markets see Ireland as a safe bet. We need to stop the doom and gloom and enjoy the prospect of Ireland once again being a economic wonder.

    Ignore all the money printing by Europe and the Fed. Ignore all the money flowing out of China by nervous investors into the property markets of Australia and the US.

  4. New Evidence

    In my private research I have uncovered that Minister Noonan has not interpreted Irish Law in the following circumstances :

    Appointing Appeal Commissioners – these should have been done by the Taxpayer not the Minister

    Appointing Banking Ombudsman – these should have been done by the ~Irish Borrower not the Minister

    Had the Minister enforced the Finance Acts properly Taxpayers and Borrowers Rights would have been Shielded and may still yet undo the decisions made by Lenihan .

    My findings will be on the table of Professors in Irish Universities some day soon. Time will tell .

  5. This is a first!

    The federal German Constitutional Court was established 1951, the European Court of Justice in 1952.

    To my knowlegde, in the past 63 years there was not a single ruling that the German supreme consitutional court had referred to the ECJ, I stand to be corrected.

    DMcW argued that:

    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.

    I have an entirely different view to offer.

    The German constitution has be diluted to the extreme by Ms. Merkel and her political cronies, it was bent to breaking point to suit the European treaties that were forced down the Irish throat in two referenda.

    The Lisbon treaty degraded the German constitution to the extreme and allows the treaty agenda to overrule German constutitional law.

    Did we really need Karlsruhe to understand that the ECB overstepped their clear mandate and broke the treaties? No, this was crystal clear and it made no difference whether GS Banker Draghi reiterated that he was acting inside his mandate, the fact remained that he acted against article 123 – Yeah well, it really is article 123, grins – of the european treaty.

    Article 123

    1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.

    2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

    No, there was no need for a supreme court to understand that the ECB broke the treaty and it’s mandate.

    So what do you think the ECJ ruling will be? I have absolutely no doubts on that result to come down the pipe.

    The power grab of European technocrats and their disasterous politics of the past six years is here to see for everyone with a clear mind. The talking shop of European Parliament has no democratic impetus worth mentioning. The undemocratic powerful forces in the EU continue to force feed 550 million people with their neo liberal agenda.

    credo quia absurdum est …

  6. ThomasFergus

    Interesting article David, but you mistakenly read the history of German hyperinflation like so many of those elites that you seem to despise!

    The hyperinflation of 1923 resulted in the Hitler-led Munich putsch, but it was a putsch that ultimately failed! The successful rise of Adolf Hitler followed four years of vicious “sound money” budgets imposed by the Catholic Centre party, among others in successive unstable coalitions, that led to massive unemployment and impoverished millions of ordinary Germans. When he came to power, Hitler copper-fastened his popularity, whether aware of this policy or not, by pump-priming the economy through a massive Keynesian programme of public works, which of course were aimed at preparing for war but which nonetheless provided employment to grateful Germans.

    The “Germans are terrified of hyperinflation” trope is always rolled out by fiscal hawks – in Germany and everywhere else – who wilfully manipulate history to suit their own short-term ends. Personally, I don’t think there’s a more cosseted sound money elite in Europe than our own in Ireland, who have believed in sound money and to hell with the consequences since at least famine times.

    • michaelcoughlan

      Hi Thomas,

      You misunderstood your own excellent observation. The Germans are terrified of BOTH deflation AND Hyperinflation for different reasons. Hyperinflation wiped out savings and the middle classes and Deflation allowed Hitler to rise and try and wipe out everyone.

      • ThomasFergus

        Fair point. I was just pointing out how damaging deflation was when there already seems to be universal acceptance that Germans fear hyperinflation for historical reasons. I think the really sad thing is that irish people prefer ‘ sound money’ along with populist policies, and have done since long before independence. Emigration is an absolutely critical part of sound money polices in a small country, and it’s a tragedy our gombeen political class will never admit to.

        • michaelcoughlan

          hi Thomas.

          Your observations are razor sharp. Can I respectfully suggest that the Irish People are pawns in all of this. David suggests at least the German Citizen has the constitutional court to protect him/her. We have no one. The Irish people haven’t a clue because if they did they would have voted no to the fiscal compact.

          very respectfully,


    • michaelcoughlan


      “The successful rise of Adolf Hitler followed four years of vicious “sound money” budgets imposed by the Catholic Centre party, among others in successive unstable coalitions, that led to massive unemployment and impoverished millions of ordinary Germans”

      I might be wrong but wasn’t the economic conditions which prevailed at the time the result of the crash of 1929? If a bubble is inflated it has to be deflated or popped or the day of reckoning will only be made worse.

  7. ThomasFergus

    In short, hyperinflation in 1923 = failed putsch.
    Austerity budgets 1929-1933 = rise to power of the Nazis. The latter is happening all over the European periphery and it’s mind boggling that our elites are allowing this to happen.

    • I agree with you Fergus and have written extensively about the proximate economic environment which brought Hitler to power – it was deflation not inflation! My arguement today is that the Bundesbank is part of the Federal Republic’s compact and whether accruate of not, the perception of inflation destroying the middle class is one narrative which recurs when talking about German monetary history.

      Thanks for the clarification


      • Adelaide

        You may already be familiar, youtube Michael Parenti’s “The Truth About…” series. His Marxist interpretation of Hitler’s rise to power and his analysis of Fascist Economics I’d highly recommended. Plus also his overview of WWII.

      • ThomasFergus

        Nice one David.

        Like all things in life then, moderation is key. Seems to me that inflating a bubble is dangerous, but deflating an already burst bubble is absolutely insane. We don’t seem to do counter – cyclical in this country.

        • With respect Thomas, How does one deflate a burst bubble? Seems to me the damage is done in the inflation. All bubbles pop or wither and die slowly. No escape.
          The economy is like one of those party balloons left up too long and the air escaped has left a slightly enlarged shriveled soft flotsam hanging by a piece of string. No matter how you try it cannot be reinflated without being destoyed.

      • The perception of inflation ruining the middle class is based on reality.
        Inflation is a function of our money system and how it is issued into existence as debt which bears interest that suffocates all people.
        It is the source of the corrupt policies that cause the constitutions to be ignored and overridden.

        It is time to examine the root of our problem, David, and stop dancing around the periphery. How about a study of the take over of national sovereign states by the international banking houses.

        The banking houses lend to governments, fund politicians, fund think tanks and organizations of influence, fund our fiat money system, fund the wars, fund the protagonists on both sides of all conflicts. No solutions will be found until these problems are resolved. The bankers control the world.

        What can we do about this , David.

        • cooldude

          Hi Tony, here is a solution to governments borrowing money which costs nothing to create from private institutions thus leading to the misery of debt slavery. Debt free money not issued through the criminal central bank cabal. This is the start to any real solution.


          • Thanks Cooldude,
            I could not have written it better myself.
            The world is wakening if not as much on this blog where sound money adherents who want out of the one world governance and a return to freedom are called gold bugs.
            Well let me say they deal in TRASH CASH when not using sound money. So really they are dumpster divers or soon will be.

          • Colin

            Hi Cooldude, that was an excellent article. Let’s hope the Bradbury Pound is re-issued.

            You are unlikely to get David’s support though, as he has spent many years de-ciphering the banking system, and earns a good living explaining how this contrived dismal science called economics affects people using simple language. This was a quite noble activity on David’s part and I applaud him for it. However, if he advocates the re-introduction of the Bradbury Pound and its equivalent in Ireland, then he is effectively turning himself into one of those turkeys that votes for Christmas, as it would spell the end of his career as there would no longer be any mumbo jumbo economic terminology or practices to translate into simple English to the great unwashed.

          • cooldude

            Glad you enjoyed the article Colin. I wouldn’t give up on David as he is very intelligent and must be beginning to question how the present system is such an abject failure except for the few on top. When the current so called recovery stalls people will begin to realize that our system needs a complete overhaul. Here is some more from that source. Very interesting


        • michaelcoughlan

          Just for you tony.

          12 year old canadian girl preaching your message.


          • A goldbug at 12? Poor girl!

            I have seen this before – it’s good.

          • She never mentioned gold once Adam. She described government money issued without debt from treasury.
            Unplug your ears and then you will hear and also understand what is actually
            being said.
            This kind of money has been suggested as a solution many many times on this forum.

            At least this lass understands the current money system.

            Where are you David on this question?

            We do not want TRASH CASH any longer.

            That is not to say it should not or could not be backed by bullion to prevent its inflationary misuse by greedy politicians.

          • Colin


            Adam is only winding you up. He’s having a laugh. Can’t you see that? Deep down he probably agrees with you, but there’s no fun in that now, is there?

          • Ah my dear Colin
            i just like to keep the record straight.
            Uttering incorrect statements affects the uninitiated not the educated like yourself.
            The lass made a brilliant speech on how to be rid of the national debt. Clearly stated and nary a word about gold.

            Where is the debate about substance. Nowhere. This proposition has been postulated many times.

            People are too interested in one upping another.

            These are serious times as you know and there will be a great reset and it will affect you and yours whether prepared or not.

            My intent is to help others get prepared so lets as I said keep the record straight.

            In this regard Ireland should lead by example and quit the Euro, issue its own money from treasury , repeal leagal tender laws , pay off the national debt with native currency issued debt free, repeal the income tax laws and set the people free.

            Where there is a will there is a way. The people are timid and affraid and poorly lead. Infact lead astray, so keep the record straight and lest have a debate about the issue itself.

            Where are you on this David. Silent as usual. It is time to get off the pot or you will be recognised as a disgrace and the master of lost opportunity.

            With respect. David is a talented man but insists on closed ears and eyes.
            See no evil, hear no evil, speaking no evil. Where is the truth in that.

            There Colin my good pal, wind me up again some time :)

  8. michaelcoughlan

    Excellent article. The us however have also being using their constitution as toilet paper for years.

    Closer to home David when the muppets in the Irish electorate were brainwashed into voting yes for the fiscal compact they handed the government a mandate to asset strip every family and citizen inthe state at thd behest of international bankers. So much for property rights in the constitution. There is simply no end to where this is going.

  9. On Europe’s Constitution

    Here is the Frankfurt school view, which I share. Habermas on Europe:


    • …an effective arrangement that results in non-transparent post-democratic domination…

      and as such, and as six years and more is clear cut evidence on the table in front of you, the results are catastrophic!

      Ever increasing inequality and the ruthless destruction of the European idea for the benefit of a single currency and multinational corporation profits are the agenda that drives the technocrats.

      “Fuck the EU”… perhaps she was right!

  10. irishminx

    This is the first blog you’ve done in a long time that brought a smile to my face. Go the Germans! Please let honesty and honour reign. The world so needs it.

  11. Birth Caul

    We are ignoring the Velocity of Money in this equation . This will have its own ‘impact print ‘ that will make it unique to what might have gone before .

    Currently the velocity is sticky and gluey and stubborn and austerity has contributed to that .

    It should be noted that ~Iceland has legally printed its own constitutional ‘ auroracoin ‘ . This is government controlled unlike Bitcoin.


    • “It should be noted that ~Iceland has legally printed its own constitutional ‘ auroracoin ‘.”

      It’s nothing of the sort John, it’s set up by some company in Panama using an Icelandic pseudonym for its CEO.

      They are merely accessing the database register of Icelandic citizens to give them all a piece of this particular crypo-currency, whether they like it or not.

      The crypto-currency market is so flooded now that each new entry has to come up with a gimmick to attract attention, miners, buyers/sellers and exchanges.

      I was working on one myself but stopped as many of them, including MaxCoin by Max Keiser are mere pump-and-dump vehicles.

      MaxCoin was the most unprofessional launch to date (last week). I don’t know what he was thinking of, letting some incompetent computer scientist student kid from Bristol take care of it. It was an utter shambles and an embarrassment.

      Bitcoin is the only crypto-currency that has any long term value and I see its value as a medium of exchange, not as a store of value like some 21st digital metal for the incorrigible goldbugs among us.

      My PhD has now been changed from Social Media to Bitcoin through force of will (mine).

      • AB@PHD

        Aside of the Heretic parable we should look a little closer to Richard WAGNER a Nazi German composer to draw insight into what happens ‘next’.

        His melody dictates that surprise reaches crescendo after the blind sense awakens again following a long sleep and in his words to day that would mean his chorus the German Constitutional Court want to appear tough in verse ( to appease the German audience) while tacitly approving OMT .

        His trot on the keys would always demonstrate a command for flexibility and creativity to maintain the beat of good EU Laws on paper only and in his finale he proceeds to a palatable unison ‘ To Print Mein Kampf ‘ that only increases the velocity around the Concert Hall .

        At that stage Forza Italia and Berlusconi arrive and the players are enlarged .

      • michaelcoughlan

        “I was working on one myself but stopped as many of them, including MaxCoin by Max Keiser are mere pump-and-dump vehicles”

        Very revealing. Thanks for this Adam. I can’t imagine keiser to be this daft though.


        • Neither could I.

          I like Max, his shows are great and I’ve enjoyed seeing him and meeting him at Kilkenomics. Stacy, his wife is also nice.

          However he’s made an error of judgement in my opinion with this. Perhaps it will revive but the launch was an absolute disaster.

          Read the comments here, and they are but a tiny portion of what is all over the net:


          • cooldude

            Doesn’t look good for either Max or his coin. Seems like a bit of a greedy ego trip but the good news is crypto currencies are a completely (well almost) free market and if you don’t fancy this coin you can use one that suits your needs. This is the way it should be and we need to repeal the legal tender laws and allow some much needed competition in the good that is money and the so called service (should be disservice) that is banking.

            Did you see Dominic Frisby on Max’s show tonight. Very good show. His next book is on the history of bitcoin which should be very interesting. The russian central bank has just banned it’s use and I am sure plenty more will follow. The mafia don’t like any competition on their patch.

          • I’ll watch it in the morning cooldude thanks.

            I actually went off watching Max for a few shows after the MaxCoin debacle.

  12. I’ll try posting this again, forget about the bitoin angle – read what the guy has done against Wall Street:


    • Anyone read this? This guy was a true warrior against the banksters, since even before it was fashionable.

      • The wall street insiders and hedge funds are not the banksters per se although some manifestation of them are to be seen.
        The banksters to take aim at are the ones who are the shareholders in the Bank of International Settlements (BIS).

        The shareholders of BIS actively control the central banks and thus the monetary policy of all countries.
        These are the basic corrupt and corrupting sources.

  13. For 13 years GATA (www.gata.org) has been painstakingly recording the paper trail to show the manipulation and suppression of the precious metals prices.

    Often derided and ignored by the MSM GATA has doggedly persisted.

    It is clear to GATA that most of the Western central bank holdings of gold have been surreptitiously sold, leased or in other ways hypothecated.

    Thre or so years ago Venezuela demanded return of its gold fro New York and with three months had over 100 tonnes returned. Recently Germany (alledged owner of 3400 tonnes or the second largest stash after the US) , due to domestic pressure , asked for the return of the 1900 tones held in NY. After a few weeks silence it was revealed that Germany would accept 15% of that amount over 7 years.Figures seem to vary but roughly 300 tonnes in 7 years or 40 tonnes or so each year,
    It has been reported that only 5 tonnes was delivered the first year.

    Speculation is rife the gold is not there and the US has done something with the gold entrusted to the safekeeping of the Federal reserve. No audits have been allowed in 50 years so nobody knows BUT GATA.
    GATA has documented proof of statements that gold will be leaased out or sold if required to suppress the price and thereby interest rates and the support of the US dollar.

    At a recent conference there was a chance meeting between Bill Murphy of GATA and a German businessman with connections.

    It now appears that this information will be presented to the press, the German government and the German central bank.
    If this is accomplished it will be momentous. It could radically change the direction of the Germans both within and without the Euro.

    Please read below.


  14. US constitution has been sidestepped for years.
    The money system is not constitutional.
    Neither is Obama


  15. Promises promises


    Ireland confident banks don’t need more capital: Reuters cited comments from Irish Finance Minister Noonan, who said that he is confident that Irish banks will pass stress tests later this year and will not require any extra capital. Noonan pointed out that Ireland had a promise from June 2012 from the EU that there would be a retrospective recapitalization of Irish banks to compensate it for the fact that it did not burn bond holders and protected the European banking system from any possible contagion. Noonan added that various members of European bureaucracy could not see how it would give effect to this, but Ireland see it as a solemn commitment made.

    Reported on http://www.lemetropolecafe.com

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