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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Morning all.
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?
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… Read more »
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.
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 .
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… Read more »
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… Read more »
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.
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.
On Europe’s Constitution
Here is the Frankfurt school view, which I share. Habermas on Europe:
http://www.presseurop.eu/en/content/article/1106741-juergen-habermas-democracy-stake
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.
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.
http://www.auroracoin.org
I’ll try posting this again, forget about the bitoin angle – read what the guy has done against Wall Street:
http://www.wired.com/business/2014/02/rise-fall-rise-patrick-byrne/
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… Read more »
US constitution has been sidestepped for years.
The money system is not constitutional.
Neither is Obama
http://dollarvigilante.com/blog/2014/2/11/the-path-to-dictatorship-is-paved-with-obama-intentions.html
Promises promises Ireland: 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… Read more »