Just about every central bank can print money with utter abandon, monetize government debt, water down the currency, inflict inflation upon the people, enrich the bankers and banks it represents, and fulfill other civic duties. But the European Central Bank is unique; it has some limitations, imposed on it by EU treaties – because whatever it does, it does to the people of not just one but eighteen countries.
Yet in September 2012, in the midst of the now forgotten but still simmering debt crisis, ECB President Mario Draghi, who knows how to make his former colleagues at Goldman Sachs a buck or two, uttered some purposefully vague but magic words that turned into an immense power grab: “whatever it takes,” and “unlimited.”
With these words he promised to buy in “unlimited” quantities the crappy, heavily discounted bonds of Spain, Italy, and other over-indebted Eurozone countries. It was a guarantee that the value of those bonds would soar. Hedge funds, banks, the hot money all loaded up on this stuff, and values soared, and risk premiums and yields plunged, and it bailed out the holders of these bonds, including the largest banks in Italy that might have toppled otherwise, and stocks soared in sympathy, as did unemployment and other problems, but what the heck, the promise wasn’t about curing sick economies. It was about enriching bondholders and speculators.
This money-printing and bond-buying promise, lovingly dubbed Outright Monetary Transactions (OMT), became the bailing wire and duct tape that has kept the Eurozone together to this day.
But it’s illegal under the EU treaties. And it’s unconstitutional in Germany because any losses by the ECB would ultimately have to be borne in part by German taxpayers, thus violating the constitutional requirement that budget matters be controlled by Parliament, not by institutions outside the country. At least that’s what tens of thousands of Germans asserted when they filed a complaint with the German Constitutional Court. Among the plaintiffs were media-savvy economist Hans-Werner Sinn, numerous other economists, law professors, politicians, euroskeptics of all political persuasions, conservatives, libertarians, lots of regular folks who were worried about the future of their kids….
And Friday, they prevailed. By a vote of six to two, the Court demolished OMT as violating both, the German Constitution and European treaties that governed the ECB. The Court peeled off the duct tape and untwisted the bailing wire that kept the Eurozone together.
The Court pointed out that the ECB is prohibited by treaty from buying debt directly from issuing governments. “It’s obvious that this prohibition shall not be circumvented by functionally equivalent measures,” it wrote. And the way the OMT is set up, it “aims at a prohibited circumvention….”
And the ECB’s clever justification for the OMT, claiming that the “monetary transmission mechanism” had been “disrupted” during the debt crisis, and that these bond purchases were necessary to fix the disruption? The Court smacked that down specifically.
One of the most vocal plaintiffs, Peter Gauweiler, member of the Bundestag, and ranking politician in the conservative CSU, was on cloud nine. He has long been a thorn in the side of the EU’s incessant encroachment on Member States’ sovereignty. He wrote on his website, “The Constitutional Court recognized that Draghi tried to obfuscate that the ECB is in reality subsidizing the funding of over-indebted governments, and in this manner is effectively redistributing the risks and losses from bond holders – large banks, large investors, and large speculators – to taxpayers.”
The Court lambasted the ECB’s “willingness” to accept haircuts on the acquired bonds, which would come at the expense of German taxpayers; the interference in the price formation by the market; and, among others, the ECB’s “encouraging” market participants to acquire those bonds in the primary market.
For OMT to be legal, ECB bond holdings could not participate in haircuts if a country’s debt is restructured, the Court ruled. There would have to be limits on bond purchases – out the window are “whatever it takes” and “unlimited.” And any purchases must be designed to have as little impact as possible on bond prices – the opposite of the ECB’s goals of manipulating up bond prices.
These handicaps would gut the omnipotence of the OMT – and therewith the Eurozone.
“Key interim success in our fight against the hollowing out of our constitutionally guaranteed democracy by supranational institutions,” is what Gauweiler called the decision. Plaintiffs “prevailed against the Federal Government and the Bundestag,” which had defended the actions of the ECB, “even though the ECB loads up its balance sheet with immense amounts of risks,” then “redistributes” the risk from investors “to the totality of the Eurozone states, and in this manner also encumbers the Federal budget without first asking Parliament as representative of the people.”
After ruling that the ECB exceeds its monetary policy mandate, “infringes the powers of the Member States,” and “violates the prohibition of monetary financing of the budget,” what did the Court do?
Fearing the collapse of the markets, fearing that the trillions of dollars and euros that this guarantee had created out of nothing would revert to nothing, fearing even more the consequences of becoming the eight Germans who blew up the euro, they said, wait a minute, we mean it, but it’s not our job to blow up the whole shebang. And for the first time in history, they shuffled the mess to the European Court of Justice for guidance.
Kicking the can down the road till 2015. Perhaps a miracle would intervene in the meantime. By definition, the ECJ is aligned with the European institutions and has decided practically every case in favor of the EU and against the Member States. Snowball’s chance in hell that this court will tell the ECB that it illegally exceeded its mandate while keeping the euro glued together.
Then the thing will be shuffled back to the German Constitutional Court, where, perhaps after another year, the eight justices nod sternly, impose cosmetic limits on the OMT, and rubberstamp it. They simply don’t want to go down in history as the eight Germans who blew up the Eurozone. Draghi was last seen Friday night taking victory laps.
Not that 2013 was such a great year for Germany, economically speaking, with growth stalling barely above the zero line. But it was a superb year for extracting taxes from hard-working people. And it shoved Germany deeper into two decades of retail quagmire. Read…. German Workers Croak Under Their Tax Burden, Drag Down The Economy
Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate “beer money.” I appreciate it immensely. Click on the beer mug to find out how:
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.