Monday, February 10, 2014

EU Czar Rehn Still Believes in Euro's "Big Bazooka"

This week's verdict by Germany's Constitutional Court is a blistering attack on the ECB, its LTRO policy (Euro equivalent of QE) and its Euro rescuing schemes

Easily missed due to the media's europhile obfuscation the wider public as well as the markets generally missed the impact of this verdict. 

UPDATE: The European Central Bank still has a "big bazooka" with plenty of ammunition to preserve the euro despite a German constitutional court statement that its bond-buying plan is probably illegal, EU economics chief Olli Rehn said on Monday. Rehn also urged the ECB to act to ensure that abnormally low inflation in the euro zone rises towards the bank's target of just below two percent. Speaking at a Reuters Summit on the Euro Zone, the European Commissioner for Economic and Monetary Affairs said it was right that a European court, not a national court, should have the final say over the ECB's actions. (Source)

Feb. 9, 2014

German Top Court Ruling Cripples Euro Schemes

Germany's top court has issued a blistering attack on the European Central Bank, arguing that its euro rescue plan violates EU treaty law and exceeds the bank's mandate. The tough language leaves it doubtful whether the ECB's back-stop scheme for Spanish and Italian bonds can be implemented if Europe's debt crisis blows up again, and greatly complicates any recourse to quantitative easing if needed to head off deflation.

The German constitutional court refrained from issuing a final ruling on the plan, known as Outright Monetary Transactions (OMT). It referred the case to the European Court (ECJ), but only after having prejudged the issue in lacerating terms that effectively bind German institutions. "The court considers the OMT decision incompatible with primary law," it said.

The verdict is a blow to the ECB's Mario Draghi, who unveiled the OMT in July 2012 with a pledge to do "whatever it takes" to save monetary union. The gambit restored faith in Club Med debt overnight and averted the collapse of EMU, but Mr Draghi was sailing close to the wind. While the German finance ministry backed the scheme, the Bundesbank opposed it as a fiscal blank cheque for Club Med, and an erosion of ECB independence.
"This is a massive attack on Europe's rescue strategy. I don't know whether markets have understood this yet," said Clemens Fuest, head of Germany's ZEW Institute. Marcel Fratzscher, from the DIW Institute, said the judgment kills the OMT for the time being. "I don't think the ECB can activate the programme as long as the case remains open," he said. "The ECB's nuclear weapon is longer operational, but you could say they bought 18 months of calm so the OMT served its purpose," said one expert.
The court judgment was shockingly harsh, though it left a possible way out if the OMT is limited in scope. "There are important reasons to assume it exceeds the ECB'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," said the court. The judges said they were "inclined to regard the OMT decision as an ultra vires act", adding that this "creates an obligation of German authorities to refrain from implementing it".

The ECB insisted yesterday [Friday Feb. 7: CT] that "the OMT programme falls within its mandate". One EU official said the Bundesbank is legally obliged to take part if called upon, but admitted that no one can force it to obey. "If necessary we could still implement the OMT without Germany, but it would not send a good signal," he said. Hans Redeker, from Morgan Stanley, said the court had crippled the ECB.

"They've taken away the ECB's weaponry and increased the hurdle for QE. The ECB won't be able to respond as another wave of deflation hits from Asia," he said. Udo di Fabio, a former German judge and author of earlier rulings on the euro, said the court is deliberately fencing in the European Court by issuing its own prior judgment.
The ECJ risks a political backlash in Germany if it deviates too far. Contrary to belief, the ECJ is not the higher judicial body. The referral is a courtesy. The German court ruled 20 years ago that it can reject any EU law that breaches German "basic law". It went further in its ruling on the Lisbon Treaty, reminding EU officials that the sovereign states are the "masters of the EU treaties", not vice versa. Yesterday, it dropped another bombshell.