Yves here. The consensus view among experts, despite considerable public opposition in Germany, is that the German Constitutional Court will not upend the Eurozone bailout mechanisms by ruling in favor of challenges to their legality. This confirms the policy issue that Dani Rodrik flagged in 2007: you can’t have national sovereignity, democracy, and deep integration of markets at the same time. You can have at most two of the three. Sadly, Europe looks ready to settle on only one on that list.
By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Cross posted from Testosterone Pit.
There is nothing like the hearings in the hallowed and staid atmosphere of the German Federal Constitutional Court to bring out the knives … outside.
“It would behoove a Schäuble” – that’s German Finance Minister Wolfgang Schäuble – “not to act like the ECB had the status of the Holy See in the Eurozone,” said Sarah Wagenknecht, deputy chairperson of the Left Party. “Otherwise, a constitutional court could someday get the idea that we have to choose between the euro and our constitution.”
But that may ultimately be the choice. All major euro bailout programs get dragged before the Constitutional Court because they’re deemed to violate the provision in the constitution that gives budgetary powers to the Parliament, not to an unelected entity outside the country. And every time, the Court nods and imposes ever tighter limitations. This time, it’s the ECB’s money-printing and bond-buying programs – the very mechanisms that have kept the Eurozone from disintegrating.
For the two-day hearings, the antagonists are lined up around the block, so to speak, waiting for their turn to influence the history of the Eurozone. 37,000 plaintiffs are trying to get the Court to rule against these programs with which the ECB offered to buy crappy government bonds from teetering Eurozone countries to prop up their banks and bail out speculators.
Among the plaintiffs are individuals, politicians, and organizations across the political spectrum, making for some very unusual and normally irreconcilable bedfellows, including Bundesbank President and ECB board member Jens Weidmann, conservative MP and euro-skeptic firebrand Peter Gauweiler – these programs would turn the ECB into an “uncontrolled power,” he said – or anti-capitalist Sarah Wagenknecht whose Left Party had filed a complaint in order to, as she said, “change Merkel’s course of destruction.”
Plaintiffs fear that the ECB’s strategy would shuffle potentially huge losses onto the federal budget via Germany’s share of the ECB’s capital key, currently 27%. But if the crisis-struck countries were to become insolvent and exit the Eurozone, their portion of the losses would be redistributed over the remaining countries, and Germany’s exposure could rise to 43%. German taxpayers would need a lot of beer – or wine, in some regions – to wash that down. And it all could happen beyond any democratic processes and without parliamentary controls, in violation of the German constitution.
While the Court can’t tell the ECB what to do, it could prohibit the Bundesbank from participating in these programs, which would accelerate by a quantum leap the euro’s demise – or cause Germany to come up with a new constitution.
But Schäuble, when it was his turn, instead of slamming the ECB’s programs, or supporting them, took a different route. He told the Court that it didn’t have jurisdiction! The ECB wasn’t subject to the German constitution, he said. “I find it hard to imagine that German courts can rule on the legality of ECB actions,” he argued. “This would create the risk that the ECB would receive completely contradictory orders about the application of laws from numerous national constitutional courts in the Eurozone.” It would be legal mayhem.
A “dangerous error,” is what a riled-up Sarah Wagenknecht called Schäuble’s reasoning. She’d skewered the euro-bailout philosophy before. A year ago, during another outbreak of the bailout crisis, she’d complained, “They’re not saving the euro but the financial sector! Banks, insurance companies, hedge funds, and speculators are being ransomed.” Now she lashed out at Schäuble. He was playing with fire, she said; the German constitution did not guarantee the existence of the euro but of democracy….
Schäuble, perhaps unwittingly, had put his finger on yet another fatal structural flaw of the Eurozone: a nearly omnipotent central bank that could bail out speculators and banks and pile the resulting losses on taxpayers of other countries, no questions asked, whenever it felt like it, to whatever extent it deemed necessary – “to save the euro,” as it were. That’s its religion, its raison d’être. An act of institutional self-preservation. And if a constitution needs to be sacrificed along the way, so be it.
But in theory, the Court could throw a monkey-wrench into the efforts to keep the Eurozone duct-taped together; it could rule against the ECB’s money-printing and bond-buying mechanisms that would create, in Gauweiler’s words, a “brave new Huxley-world of the unlimited debt,” a world where “money is no longer earned but printed.” Read…. The ECB’s Forked-Tongue Policy To Save The Euro
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THE CONSTITUTIONAL COP-OUT
OK, but WR forgets one thing. It is the sovereign right of a government to enter upon binding treaties. Which is what the Federal Republic of Germany did signing the Maastricht Treaty in 1992. That treaty was ratified by the Bundestag.
The treaty prescribes common responsibilities upon its signatories to uphold and manage properly the common-currency euro. And, to do so, many aspects of internal financial management of the currency may allow the Federal government to escape “supposed” constitutional limits.
Including “bail-outs”, which is simply loaning (by means of a central fund, that is the creditor) to debtor countries a debt to be repurchased from the creditor by the debtor at some time in the future. Which means a loan and not a gift, as so many think of it.
Yes, this could mean a loss for the creditor, particularly if the debt is sold back to its debtor at a lower price than it was purchased; which is entirely possible.
Nonetheless, that is the cop-out that the Supreme Court should and could opine as regards its Constitution. Will it do so?
Wiser heads would … if the EU is to kick-start some economies in the doldrums to get them back on track to growth.
CONSTERNATION
I really do not understand the consternation, except that of a bad-faith Germany. That is, a country that benefits greatly from the EU common market, but is very suspicious of loaning to debtor countries allowing them to return to growth economies.
A lesson from history: America, after WW2, could have walked away and said to Europe: “You got yourselves into this mess, now that the war is over, get yourselves out of it!” But, it didn’t.
Instead, the US came up with the Marshall Plan by which European economies – and particularly that of Germany, the most ravaged – reinvigorated and rebuilt themselves.
Have the Germans forgot history? Methinks yes.
MY POINT?
I will remind our German friends that the Marshall Plan money was in the form of grants that did not have to be repaid. (See here.)
The title is misleading.
Germany is grappling with the choice between bailing out its insolvent banks and pretending that they are not.
Can corporations renounce their citizenship? Can they be deported? Deutsche Bank could fold its tent and move to Hong Kong. Then Germany would have no particular reason to vote in favor of ECB power. Instead of Germany or Spain leaving the EU, their TBTF banks should leave.
Take your thought one step further and think about the global plutocrats that own the corporations/banks. They are way ahead of your thinking, I am sure…..they will be in comfortable chairs when the music stops.
What we appear to be witnessing is a battle for control between the declining power of the Nation State and the rise of the global Market State (or State Market in China). This battle seems over in the US with barely a whimper from the impotent Left but Europe ,with it’s long history of Feudalism and Empire, is resisting. The result could define the global economic and political relations for a century or more. This is a tipping point.
Jim
Much ado about nothing. Arguments for show. Foregone conclusion.
I have to agree. There is no grappling being done aside from trying to figure out which way to justify a pre-ordained conclusion. There will continue to be Euro bailouts. Now the pointy-headed judges are just being asked to decide what color of lipstick would most befit this pig.
The German Court hasn’t voted against Euro bailouts yet, despite having multiple chances to do so. I don’t see them changing course now. Judges, especially at that level, are still political animals. Just less overtly so.
Quite frankly , if a Harvard-trained former constitutional law professor can come to believe that it’s constitutional in America to secretly order asassinations of U.S. citizens on U.S. soil with no due process, then the internal corruption being asked of the German judges is quite trivial, hardly rising to justify the term “grappling”…
It’s Sahra Wagenknecht: she’s partly of Iranian descent.
I agree with OMF. The German rich and elites have had no Constitutional problems benefitting from the euro. They have pressured Southern governments into looting and immiscerating their peoples so that the bad loans of the German banksters will be made good. They had no problem with that either. But that they might have to even indirectly take on responsibility for bailing out their own banks, well, that clearly is unconstitutional.
Sir, you are exactly correct about the intensions of the elites, and by extension, the judges in Germany, — you are spot on. But historical intensions and subsequent effects are quite different, as I’m sure you would agree.
The German elites do not fear a weaker euro, for a list of reasons, but, there are bad effects of a weaker euro which have not surfaced in their natural amount, due to the behavior, to date, of all of the central banks, and due to the preferences, to date, of investors.
Silvia and Hans (the elites ) will not let their wealth be eroded as the euro falls. They will ( try ) to shield it. To date, they have been positioning for this in such things as US equities, – and it is probably a cash long position, since the normal investor does not have the skill to maintain a hedged position for a very long time period without losing money.
So far so good, – But- what happens when the stock market has risen so far that even fools know that it can go no higher, perhaps for a decade, and at the same time, there is, as of yet, not any inflation to be seen. Generally, at that point, they will begin to shift some of their money into commodity investments, and out of equities, and That’s when the daisy chain of bad things begins to happen, because-
When equities are rising,- and commodities are falling,- the middle class feels bright, but when the reverse is occurring, they are Brightly Angry, and begin to feel as though something needs to get fixed. Note: Commodities, may not actually nomially rise then, but the change in investor’s preference will cause commodities to clear in the marketplace at a price which is too high to keep the demand curve for finished goods and services not to begin to drop,- Because, too much of the money printed is going to the bank bondholders, and an insufficient amount of it is going out as direct support, via government spending.
So, -they ( and us ) have been borrowing against the future ( self-buying treasuries ) to try to have our cake and eat it too, but, borrowing against the future of the average person, to pay-off the effects of bad investment decisions on the part of the wealthy, has poor optics, and creates social strain.