The ECB’s Forked-Tongue Policy To Save The Euro

In theory, Germany’s Federal Constitutional 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 mechanism, lovingly dubbed Outright Monetary Transactions. It was launched with fanfare last September. Actually, not with fanfare but with a few vague words, uttered by ECB President Mario Draghi himself, including the magic one, “unlimited.”

A word so powerful that it would bail out speculators and banks that had bought crappy Spanish and Italian debt at steep discounts. Bonds and stocks surged – as did unemployment and other problems, but what the heck, OMT wasn’t about curing sick economies. It was about a central bank promising to bail out speculators.

During oral arguments on Tuesday and Wednesday, the Court weighs if OMT violates the constitution’s requirement that budget matters be controlled by Parliament, but a ruling will be delayed until after the general elections on September 22. If the Court, which has no authority over the ECB, rules that aspects of OMT are unconstitutional in Germany, it could forbid the Bundesbank from participating in the one measure that has kept the Eurozone together. The Eurozone as we know it would unravel.

In practice, the Court would never do that. Given how it has ruled on euro-related issues so far, it will find a way out of the debacle, regardless of what it says in the constitution. And if it really wants to throw the book at the ECB, it could nod with an impish frown, impose some stipulations, and rubberstamp the rest.

But that hasn’t kept the mess from ballooning beautifully out of control in Germany where the ECB’s efforts to save the euro and itself – without euro there would be no ECB – are viewed with a decided lack of enthusiasm: 48% of the Germans side with the 37,000 plaintiffs, believing that the Court should stop the ECB’s whatever-it-takes-to-save-the-euro approach; only 31% believe that the plaintiffs are wrong; and despite the dense coverage in the media and in every corner of the internet, 21% still have no opinion.

Bundesbank President and ECB board member Jens Weidmann lambasted OMT from day one as “equivalent to funding governments by printing money,” warned of the risks of these measures, and questioned their legality under German law. He claimed that the ECB had overstepped its mandate by promising to fund the deficits of teetering countries, ultimately exposing German taxpayers to the risks and costs of bailing out speculators in foreign debt.

At the hearing, Weidmann faces a former associate and now antagonist, Jörg Asmussen, member of the ECB’s executive board, who’d praised OMT last week as “probably the most successful monetary policy measure undertaken in recent times.” Then, just before the hearings, he counter-attacked in the mass-circulation tabloid Bild:

“When we announced the program, the Eurozone was near uncontrolled disintegration. Important companies and banks began to prepare for it. At that time, the ECB was the only European institution capable of taking action, and it had to make clear to every speculator, ‘Do not mess with the ECB.’ The euro will be defended. The markets have learned the lesson.”

Draghi and his ilk must be getting cold feet. Over the last few days, a 52-page document that the ECB submitted to the Court in defense of its policies surfaced. In it, the ECB declared that its “unlimited” purchases of debt were suddenly not unlimited at all, but were in fact limited to €524 billion!

It had to do with internal limits. The OMT program could only purchase debt that would mature in 1-3 years. As of December 2012, Spain had €143 billion of this type of debt outstanding, a mere 26% of its total debt, and Italy €343 billion, or 32% of its debt. The ECB assured the court that it actually wouldn’t even go that far.

The message should have been a deafening alarm for the market; it should have sent speculators scrambling for the exits. Well, some scrambled alright. But the slick calculus wasn’t meant for them. It was meant for the justices of the Court, perhaps to fool them, perhaps to offer them a fig leaf. And market participants already know that the ECB doesn’t have to stick to these internal limits, or any limits; it has already figured out how to get around treaty limitations against buying sovereign debt.

And on Monday, Draghi said in an interview on German TV that the ECB would suddenly not use its OMT program to save bankrupt countries – or as he said more politely, “we will not intervene to ensure the solvency of the countries if they are profligate.” So profligate countries would be allowed to go bust. But – and there his tongue split in two again – “if there is a confidence crisis in the euro which is threatening the solvency of the countries not beyond what their fundamentals are, then we are ready to intervene.”

The plaintiffs, who want to keep the Bundesbank from participating in these interventions, were not impressed. Eternal euro-critic and Member of Parliament Peter Gauweiler (CSU) assured his fellow citizens that OMT would turn the ECB into an “uncontrolled power.” In exchange for giving up control, Europeans could live “in a brave new Huxley-world of the unlimited debt,” a world where “money is no longer earned but printed.”

So the Eurozone debt crisis remains “solved,” and there is nothing to worry about, other than a few cosmetic details, for example that the ECB, in order to keep the monetary union glued together, has one message for the Court and another for the markets – based on its forked-tongue policy.

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