Banking Union challenged at the German Constitutional Court

It emerged over the weekend that five German academics have launched another challenge at the Bundesverfassungsgericht – the German Constitutional Court (GCC) – this time against the proposals for a banking union based on the Single Supervisory Mechanism (SSM) at the ECB and the Single Resolutions Mechanism (SRM) at the Commission, with a Single Resolution Fund (SRF) set up via a separate intergovernmental treaty.

For background on all these institutions, see these links: SSM, SRM & SRF. 

One of those bringing the complaint is Prof Markus Kerber of Europolis (who has been heavily involved in previous suits). According to the press release the key point of the challenge is:

• That the banking union plans overstep power given in Article 127 TFEU. This is the article which was used to create the SSM in the ECB. Essentially it seems the group take issue with the idea that this could be done since the article refers only to conferring “specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions”. The thinking seems to be that, article 127 allows for the ECB to take on certain specific tasks, but not to turn the ECB into the eurozone's single supervisor, giving it complete supervisory control over certain banks and, to an extent, superiority over national supervisors (which some might see as a transfer of power).

• A key question will be around the amount of power transferred to the ECB. (There is no doubt it has become one of the most powerful institutions in the eurozone crisis both due to de facto action and de jure changes. There are certainly valid questions to be asked here, particularly since the level of democratic oversight is limited due to difficulties in combining this with its strict independence when it comes to monetary policy matters).

• Although the details are yet to be released, the complaint is also likely to question the legal base of creating the SRM inside the Commission and the pooling of national funds through the SRF. The main questions here relate to the level of control and oversight from the national level, particularly whether the Commission is the right institution to take on this new role and whether it is gaining too much power - not least since the decision was taken under qualified majority voting due to the use of the single market legal base.

The group are far from alone in raising legal concerns surrounding the basis for the banking union. As we have previously noted, both the German government and the European Parliament have expressed legal concerns over the structure; the former with regards to the fiscal impact and the legal basis for pooling of funding and the latter with regards to the use of intergovernmental treaties and the circumvention of the EP. (Ironically, such intergovernmental agreements arose in large part to avoid Germany’s original concerns).  The German government’s concerns have also been mostly dismissed by the Council legal service previously.

The UK Government has also made noises about concerns around the use of the single market article (114) to create a new eurozone architecture.

As the FT notes, these cases take some time to work their way through the system and the GCC has shown a track record of generally siding with the EU, albeit often with some caveats.

Given said track record and the previous opinions expressed by the Council legal service, we can’t help but feel the outlook is already dim for this challenge. As with all eurozone policies, overturning it would likely cause huge market disturbance and shift the eurozone back towards an existential crisis – something the court is usually quite aware of.

That said, the court could add caveats in terms of the democratic assent required for banking union and the role of the Bundestag where funds are concerned. It could also pass the judgement onto the European Court of Justice, as it has done with the case over the ECB’s bond purchase programme the OMT, not least because it seems to mostly question the legality under EU treaties.

In any case, this is certainly one to watch and not just from the eurozone perspective. Any ruling could well set a precedent and have a role in determining how far the eurozone can push certain treaty articles in terms of legal bases but also how it fits with national constitutions. In other words, it could be important in determining the issue of euro-ins vs. euro-outs as the EU develops.

German Constitutional Court believes ECB bond buying is illegal, but asks ECJ to rule first

Hanging up their robes? Ball is now in ECJ's court

As has been widely reported this morning there has been some surprising news out of Karlsruhe with regards to the ECB's bond  buying programme and its legality.

Our full take is here, with the summary below:

Summary: The German Constitutional Court (GCC) – Bundesverfassungsgericht – has referred several questions surrounding the ECB’s Outright Monetary Transactions (OMT) programme to the European Court of Justice (ECJ). It is evident that the Court believes the OMT is illegal and incompatible with EU and, therefore, German law. However, the Court only has jurisdiction to rule on matters of German domestic law. It therefore argues that it must refer the key questions to the ECJ – the body which interprets EU law – given that the ECB’s mandate and any overstepping of EU treaties is obviously a question about EU law.

The ECJ is likely to side with the EU institutions and rule that the OMT is compatible with EU law, with the GCC likely to therefore say its hands are tied. Still, the decision throws new uncertainty into the fragile eurozone economy and could hamper the recovery. The GCC may also, in its interpretation of the OMT’s compatibility with German law, insist in new red lines - potentially limiting the level of purchases. This itself would severely restrict the role of the ECB. 

Markets, while briefly spooked, seem to have broadly recovered, whilee the euro remains slightly weaker. This doesn't seem to have had much impact, with many coming round to the view that the OMT will remain practically usable until the ECJ almost inevitably fully approves it.

The broader fallout is interesting, as this case has often been cited as one of the remaining risks in the eurozone. Despite the GCC's strong objections to the OMT, this could end up actually bolstering the ECB's position.

More generally as well, it does raise questions about Germany's role in monetary policy and the GCC's role. On EU related issues it is ultimately bound by the ECJ's interpretation of EU law. Furthermore, we can't help but feel that the Court has tried to somewhat dodge this very difficult and politically sensitive decision. It also suggests Germany may be struggling to fulling impose its will over monetary policy - although it clearly remains very powerful and many would argue continues to hold action such as asset purchases at bay.

Nonetheless, plenty of food for thought and an interesting shift in the dynamic of the eurozone.

New OE/OEB poll: Significant support among German voters to slim down EU

There is no doubt that Germany is strongly wedded to the idea of ‘more Europe’ -- at least rhetorically. But when it is boiled down specific EU policies, as the new Open Europe, Open Europe Berlin and YouGov Deutschland poll shows, there is significant support amongst German voters to slim down the EU.

Key findings of our poll illustrate that the European Commission and the European Parliament are the least trusted of the 13 different national and European institutions tested. Only 33% and 30% of German voters trust the EP and EC respectively.

On the other hand, the highest ranking institution is the German Constitutional Court (trusted by a whopping 71% of Germans). Interestingly for Brussels, this is of course, the same Court which has been throwing up barriers to further eurozone integration based on its interpretation of the German Basic Law and the EU Treaties.

There is also significant support among German voters to devolve powers from the EU back to the member states: 50% agree that it’s a good idea, only 26% don’t. Similarly, 41% think that the EU should have less powers, 36% are content with the status quo – and only 23% think the EU should have more powers.

Moreover, a majority of Germans want less Brussels involvement in at least eight policy areas:

When it comes to the question of Britain in the EU, the Germans overwhelmingly want to keep Britain inside.  63% think the UK and Germany could be strong allies in reforming the EU.

  
France is by-and-far still seen as Germany’s most important ally in Europe. It is ranked first by 61% of respondents, being followed by Britain on 19%. However, David Cameron inspires more trust among Germans (ranked first by 30% of respondents) than French President Francois Hollande (ranked first by 26% of respondents.)

Germany is a conflicted country when it comes to Europe – while it is ‘pro Europe’ in temperament,  when it comes to the actual policies, German support for 'more Europe' is heavily caveated.

I-spy: EU-US trade talks under threat?

To what extent have the latest leaks harmed the EU-US trade talks?

Fugitive whistleblower Edward Snowden’s leaks just keep giving.

First there was Prism, then Tempora. And now, as reported by online by German magazine Der Spiegel over the weekend:  the US has allegedly been spying on EU missions and institutions on both sides of the Atlantic.

Here's a round-up the European response at the national and EU levels:

National

The leaks have caused the most outrage in Germany, which was allegedly monitored more than other countries, leading the Federal government to respond on Monday.

"If it is confirmed that diplomatic representations of the European Union and individual European countries have been spied upon, we will clearly say that bugging friends is unacceptable...We are no longer in the Cold War", said a government spokesman in Berlin. He added that Chancellor Merkel will soon be speaking to President Obama about the matter.

Other German politicians that had been clamouring for a US explanation include German President Joachim Gauck (who quoted Benjamin Franklin: "Those who give up liberty to gain security will lose both'"), Vice-Chancellor Philipp Roesler and Justice Minister Sabine Leutheusser-Schnarrenberger. The SPD, the Greens and Die Linke had also been agitating for Chancellor Merkel to intervene.

France isn't happy either, with French President François Hollande calling for an "immediate" end to the alleged spying if the EU-US trade negotiations are to continue. "We cannot accept this kind of behaviour between partners and allies...There can be no negotiations or transactions in any areas until we have obtained these guarantees, for France but also for all of the European Union, for all partners of the United States."

French Foreign Minister Laurent Fabius added the reports were "completely unacceptable," if corroborated, while his colleague, Christiane Taubira, the Justice Minister,  called US actions “an act of unqualified hostility.”

Italy’s Defence Minister Mario Mauro weighed in this morning, saying that US-Italian relations would be “compromised," if the reports are true. "If we are allies, if we are friends, [then] it’s not acceptable that someone in this relationship behaves like the Soviet Union used to behave towards its satellite states,” he added.

EU

EU officials, political groups and MEPs are miffed too.

Catherine Ashton, The EU's foreign policy chief said the EU is seeking  “urgent clarification." Meanwhile Martin Schulz, President of the European Parliament, said he was “deeply worried” by the reports, and warned of a “severe impact” on EU-US relations if they are true (remember, the EP's role in EU trade talks was enhanced under the Lisbon Treaty).

Schulz told French radio station France 2 that the US had crossed a line,"I was always sure that dictatorships, some authoritarian systems, tried to listen ... but that measures like that are now practiced by an ally, by a friend, that is shocking, in the case that it is true."

This was echoed by Viviane Reding,  the EU justice commissioner: “Partners do not spy on each other,” she said. “We cannot negotiate over a big transatlantic market if there is the slightest doubt that our partners are carrying out spying activities on the offices of our negotiators."

“How should we still negotiate [a free trade agreement with the US] if we must fear that our negotiating position is being listened to beforehand?” said Elmar Brok, the chairman of the European Parliament’s Foreign Affairs Committee.

In an interview, Czech MEP Libor Roucek, the deputy chairman of the S&D group for Foreign Affairs and Transatlantic Relations, said he "can't exclude the option that [he's] being monitored by the US secret services."
 
Some went further, calling for a suspension of the US-EU trade talks altogether. This included the European Parliament's Green Group, and MEPs like the Dutch social democrat Thijs Berman: "[The] US spies on EU diplomats. That's not how we can negotiate a free trade deal. Suspending is logical step," he tweeted on Sunday.

Press
 
The revelations have caused an uproar in the European press (Le Parisien’s ‘hammy’ front page of Obama ‘listening in' captures the general drift), and most of all in Germany. 

Spiegel Online published a commentary today that not only criticised America, but also the lack of action by the government.“The federal government has failed to protect Germans from America’s spy-attacks. This is unacceptable to citizens," it says, calling for an “independent education”  for the US from the German Constitutional Court and a European Committee.

Meanwhile, Austrian Daily Der Standard published a commentary that diverged from the general thrust of European media feeling. Spying is to be expected says the piece: "It would be surprising indeed if the opposite were the case. Being spied on by an ally is about as normal as the systematic surveillance of political opponents."
  
Perhaps Der Standard is right that much of this skulduggery does go on, even amongst allies. But, still, although this is unlikely to deal a fatal blow to EU-US trade talks, the political consequences could well be that certain European countries dig their heels in a little firmer in the negotiations.

On a more general note, for individuals concerned about their privacy and civil liberties, this type of issue only heightens fears that the increasing amount of personal data shared among EU governments isn’t safe and that the protections are inadequate.

In recent years the EU has been developing more and more data sharing databases, and it is not always clear to the general public what happens to their data – this will only fuel ‘big brother’-type fears that is open to misuse, abuse or simply could be accessed by anyone.

Deliberations begin as hearings draw to a close in Karlsruhe

The hearing at the German Constitutional Court into claims against the ECB's crisis policies is now over. Day one saw verbal jousting between the two men to the left (Bundesbank President Jens Weidmann and ECB Executive Board Member Jörg Asmussen) which we covered on our live blog. Day two of the hearing was a bit more cagey and less political but possibly more revealing in terms of the Court's thinking.

Constitutional Court Judge Peter Müller kicked off by reiterating the strict rules of the game:

“it is clearly defined in which china shop the elephant of monetary policy is not allowed – monetary state financing.” 

Clemens Fuest, Research Director at the Oxford University Centre for Business Taxation, shrugged his shoulders and replied:

“If OMT is ECB’s commitment to buy state bonds to a non-defined extent, than I wouldn’t know how to prevent the contact with the china shop”  

Being slightly more direct (as might be expected), Head of the Ifo Institute Hans-Werner Sinn said that the ECB engages in “regional fiscal policy” and that the Central Bank’s OMT programme is basically “a free insurance for investors when a state goes bankrupt”.

It's clear the Court remains concerned that the ECB could overstep its mandate. President of the Court Andreas Vosskuhle suggested that the current conditions attached to the OMT, the ECB’s bond-buying programme, are on a “very abstract level” but if correctly applied “could be a good middle way…of distinguishing between monetary and fiscal policy”.

A rather diplomatic construction but conditionality is a key issue here, as we’ve pointed out. The fundamental problem is that since there is no legal documentation and the OMT has never been tapped, it is very challenging for the court to judge how strictly the conditions will be applied. They could make a value judgement over whether they trust the ESM and eurozone politicians to fully implement the conditions but this could well be beyond the scope of the legal judgements the Court is allowed to make.

As Süddeutsche Zeitung's Markus Zydra points out, there is significant ambiguity around one of Asmussen's key points - that the OMT is practically limited since it can only purchase short term bonds. This is especially true given ECB President Mario Draghi's (and other's) previous remarks that there are no ex-ante limits to the OMT. Chief economists of DZ Bank Stefan Bielmeier put it nicely saying, “there is a dual rhetoric of the ECB…[they] tell everybody what they want to hear” - exactly as we noted here.

A running theme of the coverage following day two has been the signfiicant time given to those arguing against the ECB. ECB proponents reportedly told Handelsblatt “we feel like at an away game”, given the level of opposition support. The paper even goes so far as to question the neutrality of the court's referees given the line-up of known ECB critics it had called to provide evidence at the hearing (e.g. Hans-Werner Sinn, Kai Konrad, Harald Uhlig, Franz-Christoph Zeitler, Clemens Fuest).

How the Court will rule remains to be seen. It's clear they have some serious concerns about the policies but are struggling given the hypothetical nature of the case - the OMT remains undefined and unused, so any claims against it rely on second-guessing its implementation. Ultimately, it could be a question of whether they take the ECB at its word or not. Approval of policies but with some extra constraints remains the most likely outcome.

A final ruling is due for September although many involved expect a delay until after the German Federal Elections on 22 September. In the meantime, there are already those calling for a re-match in Luxembourg.

German Constitutional Court live blog: One of the most important cases in the Court's history?

The German Constitutional Court in Karlsruhe

The German Constitutional Court’s (GCC) hearings into the legality of the ECB’s actions to combat the eurozone crisis – and specifically the OMT bond buying programme – kicked off this morning. (See here for the background). In a front page leader, FAZ describes the case as one of the “most important” in the court’s history.

Public opinion in Germany is mixed, with a Forsa poll for Handelsblatt finding that 48% of Germans hope that the Court will put a stop to the OMT, while 31% believe that the complaint against the ECB is unjustified. As we noted in our flash anaylsis on the topic yesterday, the GCC can't actually stop the ECB. At worst, it could remove Germany from the ECB's bond buying programme and probably, therefore, from the eurozone itself. (A poorly phrased poll question, then, but a very telling result nonetheless).

With Schäuble, the German Finance Minister, and the ECB's positions already well known (that OMT is within the Central bank's mandate), we can safely say that the highlight of the day will come  from the opposing side, in testimony of Bundesbank President Jens Weidmann. In terms of their specific grievances, it will be the first time we will hear a detailed, public explanation of where the Bundesbank stands on this issue, while the tone of Weidmann's comments will also be interesting. Will there be any more Faust references we wonder?

Check our twitter feed for live updates from Karlsruhe throughout the day. We will also continue to update this blog as things develop.

17:45

Bundesbank President Jens Weidmann has now had his say - and again his points were very much as expected (his full statement is here but only in German for now).

• Warned that ECB OMT blurs the line between monetary and fiscal policy - this makes it more difficult to achieve price stability and spreads solvency risks amongst eurozone countries, but does so without any parliamentary or democratic approval.
• Pushed for a narrow interpretation of a central bank's primary mandate, with a complete focus on price stability.
• Suggested that the OMT does represent potential losses for taxpayers, arguing that if the ECB took on significant amounts of risky debt, it may face large a loss which it cannot absorb and may require aid from member states.
• Argued that even secondary market purchases can overturn the force of market discipline and undermine fiscal autonomy.
• Issued a warning over the interpretation of the real-risk premiums for bonds, which he suggested was very subjective and dependent on future policies.
• Accepted that the inflation outlook in the eurozone fits with price stability at the moment, but still expressed serious concern about comprising the ECB’s focus on this.

It seems to us that, of the two sides, Weidmann had the tougher case to make. Ultimately, as much of the above shows, he is forced to consider hypothetical scenarios and potential worst cases. These are undoubtedly risks that should be highlighted, but it does leave one feeling that his argument is slightly less clear cut than Asmussen’s.

Having heard the key testimony of both sides, we still expect the court to side with the ECB, but with some caveats (although how strict they will be is very much up in the air). Of course, this could still develop more tomorrow. 

16:20

Asmussen has now concluded his testimony and subsequent Q&A, and the ECB has also helpfully put a transcript on their website. Here are the key points he made:

• the OMT will have the ability to sell bonds as well as buy them, and it will not take them off the market permanently, unlike its forerunner the SMP (in fact Asmussen repeatedly highlighted the differences between the two);
• the OMT is pari passu (equal to) other creditors,
• the OMT seeks only to reduce unwarranted interest rate spikes and is not aimed at harmonising financing conditions of member states,
• the ECB would react if a country were to try to game the system by converting all its bond issues to a short maturity (of up to three years), but that in any case markets themselves would "see through and deny" such attempts,
• the only risks associated with the programme stem from countries operating "un-sound" policies, but that those states that fail to comply with the OMT's conditionality could be faced with the prospect of having to leave the eurozone.

The comments were more or less as expected. However, there are a couple of interesting points. First, the fact that the bonds purchased under the OMT will be judged at market value suggests that, if they are purchased and then decline in value, the ECB could be facing losses on its balance sheet. A tricky technical and political issue. Second, the point about 'un-sound' policies leaves us feeling slightly uneasy. Its clear that even with an ESM bailout programme, implementation may not be up-to-scratch. Meanwhile, it also highlights the clear link that would be established between ECB policies and the fiscal (and other) policy of national governments. This surely raises questions about the ECB's independence.

Asmussen also admitted that the policy did have de-facto practical limits given that it will only purchase short term debt, as reported over the weekend.

15:10

Handeslblatt reports that Philip Rösler, the German Minister for Trade and Vice Chancellor is coming under increasing pressure from his own FDP party to take a stand against the ECB, following the Handelsblatt/Forsa poll showing that almost 50% of Germans hope that Karlsruhe will stop the ECB’s OMT programme (despite this actual course of action not being possible, see blog intro above on this).

Frank Schäffler, the financial expert of the FDP parliamentary group, told Handelsblatt Online that "Working towards a market-economy is widespread among the followers of the FDP. Liberals know that prosperity cannot be printed from the ECB.”

The irony of clinging on to central bank independence, while using political pressure to change the course of the ECB is not lost on us - nor on Rösler it seems, who said: “We must not allow this course toward stability to be broken up through the the attempt to exert influence on the European Central Bank.”

13:55

These comments from ECB Executive Board member Yves Mersch seem to confirm our feelings that the ECB is trying to have it both ways over its refusal to publish the OMT documentation (see 13:30):

Mersch: "controlled uncertainty on the OMT is necessary"
— zerohedge (@zerohedge) June 11, 2013

13:40

Germany's new anti-euro party Alternative für Deutschland has just put out a press release citing Professor Joachim Starbatty - one of the original plaintiffs in the case and now one of AfD's top candidates in September's elections - warning that under the OMT, German taxpayers will be responsible for liabilities that are "no longer the responsibility of any government or parliament". The party is clearly hoping the publicity around the hearings will boost its poll ratings.

13:30

Asmussen is clearly channelling Draghi in his comments below. The ECB's continuing refusal to simply publish the legal documents relating to the OMT is at best strange and at worst downright obstructive. It does beg the question: what are they trying to hide? Maybe nothing, but at the very least it seems they are trying to have the best of both worlds. By refusing to reveal the exact terms and conditions, the ECB can try to address German concerns over the extent of the OMT (as we have seen them doing in the run up to this case) while also being able to continuously reassure markets that the scheme is in fact "unlimited".

Such a balancing act is tough to pull off and may add to confusion if it breaks down. Some transparency would be welcomed. It needs to happen at some point, who's to say it would be better revealing the legal documentation just when the OMT is being tapped, surely by definition that would be a period of crisis?

13:05

The ECB's Jörg Asmussen is up now making the point that the ECB would actually adopt a legal ordinance before any bonds were purchased:

#ECB's Asmussen: #OMT Documentation Ready For Publication When Needed. OMT Documentation Can Be Published Within Days
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

#ECB's Asmussen: #OMT Cannot Be Activated Before Publication Of Guidelines
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

11:15

German Finance Minister Wolfgang Schäuble has spoken, and as expected, he backed the ECB:

German FinMin Schäuble: #ECB Independence Gives It Wide Scope For Decision-Making
— Holger Zschaepitz (@Schuldensuehner) June 11, 2013

Schäuble tells court government sees no evidence that the ECB has overstepped the bounds of its mandate. #karlsruhe
— Michael Steen (@michaelsteen) June 11, 2013

German finance minister Schaeuble argues the court shouldn't even be considering the OMT case, as they've no jurisdiction there. #karlsruhe
— Jeff Black (@Jeffrey_Black) June 11, 2013

ECB gears up for German Constitutional Court scrutiny

This is set to be an important week for the ECB and therefore the eurozone.

As we noted in a flash analysis this morning, the German Constitutional Court (GCC) will hold a hearing on the 11 and 12 June focusing on whether the ECB’s policies have infringed either its own or the Bundesbank’s mandate, and if these have created fiscal risks without democratic approval.

The focus of the case will be the OMT, the ECB’s flagship bond buying programme, the announcement of which is widely seen to have played an important role in easing the eurozone crisis.

Why is the case important?

1. Highlights the tensions at the heart at the eurozone: the case is a microcosm of the wider debate as to whether Germany is willing and able (in terms of legal constraints) to do what is seen as necessary to save the eurozone. It also puts pay to the idea that once the German government has a fresh mandate following September’s election, there will be a swift move towards more eurozone integration – these legal questions will remain and will continue to crop up.
2. Pits the ECB against the Bundesbank: linked to the point above but this is also a very awkward division within the eurozone architecture, as personified by the confrontation of the ECB's Jörg Asmussen on one hand and Bundesbank President Jens Weidmann on the other. The Bundesbank will likely have to keep implementing ECB policies despite it now being well known that it fundamentally disagrees with them. 
3. Further constraints on crisis policies: in the end, the GCC will likely rule in favour of the ECB. However, as with previous rulings, it could set out red lines and restrictions to protect the German Constitution – this could throw a new element of risk into the crisis.
4. Increased transparency on ECB actions: this is something which we, and others, have been calling for for some time. One benefit of the case is that it has increased scrutiny on the OMT with the ECB now admitting it may be forced to published the legal documents which will layout the practical functioning of the OMT. This could generally be beneficial, although if markets do not like what they hear then it could actually contribute to market jitters.

With this final point in mind, there was an interesting story in FAZ over the weekend, which suggested that the OMT is not in fact as “unlimited” as had first been thought. Indeed, FAZ claimed that it is limited to €524bn, since the ECB will only be allowed to purchase debt with maturity between one and three years.

This constraint was always known, as we noted when the programme was announced. The cap essentially arises because this is the total amount of debt from Italy, Spain, Ireland and Portugal (i.e. those countries most likely to access OMT). The cap doesn’t seem to be hard and fast then, since countries could simply issue more short term debt. However, this does come with its own risks (another point we raised at the time), and the ECB has suggested it would look to prevent such an approach, although it hasn't said how.

Handelsblatt goes even further, suggesting that there is an internal rule which limits the ownership of bonds by the ECB to 50% of the given market, suggesting this means the cap is even lower at €260bn.

But even if the cap isn't quite what it’s cracked up to be, it’s very interesting that the ECB itself is selling it to the GCC as a limit. Clearly, there is some concern about the outcome on its part.

Despite a definitive ruling not expected until the end of the summer at the earliest, and more likely after the September elections, there could well be plenty of interesting revelations and disputes aired over the next few days, which we will of course be covering in detail.

The future of the eurozone: Will it be the lawyers who have the last laugh?

Update 18:00 The new German anti euro party Alternative für Deutschland have put out a press release claiming that di Fabio's report is a "body blow for the euro rescuers" and that he is corroborating AfD's stance that the ECB's bond buying constituting illegal state financing.

******************************************

We have frequently pointed out the significant role played by the German Constitutional Court in the eurozone crisis, including before it came to be in vogue. The Court is due to hold hearings next week into the ECB’s handling of the eurozone crisis, specifically whether the legality of the new OMT bond-buying programme. In an interesting development ahead of the hearings, Udo Di Fabio – a prominent legal scholar and former German Constitutional Court judge has warned that if the Court rules that the ECB has violated its ban on state financing, in the most extreme case, the Court could then commit the German Parliament and Government to withdrawing from the euro.

This is the key quote from his report:

"If the rulings of the Constitutional Court were unsuccessful in influencing the federal acting bodies, it [the GCC] would have to make an extreme-case ruling that the further participation of Germany in such a system would be constitutionally untenable."

This is admittedly an unlikely scenario – we expect the Court to approve the measure albeit with some additional conditionality and carefully expressed warnings for the ECB not to go too far – this has been standard procedure in the big EU/eurozone cases recently. Ultimately, despite the legal ambiguity surrounding the ECB and the wider handling of the eurozone crisis, the Court is mindful of the fact that it does not operate in a political vacuum. Di Fabio’s warning does however highlight that compliance of the German legal establishment cannot be taken for granted indefinitely.

Has Germany really gone off the idea of EU treaty change? (Part II)

Some EU pundits have spent the last several months arguing that a change to the EU treaties is a non-starter. "Don't you know", they say with a high degree of confidence "the Germans have gone off it." And in any case, no one else wants it any way for fear of ratification problems, not least in France.

Charles Grant from the Centre for European Reform said last week that "the Germans have cooled on the idea of rewriting the treaties." Another observer on BBC Newsnight (not our guy of course) said as late as last Friday that "the German government isn't at all keen on EU treaty change in the short-term", which the studio discussion then picked up on.

It's is definitely the case that the appetite for EU treaty change across Europe is limited, and for that reason it'll be a challenge to achieve it. But as we've said repeatedly, it's absolutely 100% wrong to say that the Germans have gone off the idea of EU treaty change. As we stated in our briefing ahead of Cameron’s Europe speech in January:

“There are currently seven broad proposals floating around for more Eurozone integration – most of which need EU treaty changes to be fully completed...Germany, in particular, is nervous about ad hoc-arrangements lacking firm constitutional grounding.”

Here is the full list:

Crucially, this also includes current proposal for a banking union, which from a German point, sit uncomfortably with the EU treaties. A few weeks ago we noted,

"Those who say that Germany has 'gone off the idea' of Treaty change - in light of David Cameron's speech where he mentioned EU treaty change as an avenue for reform - clearly haven't quite appreciated the nature of the proposals floating around."

Well what do you know, as we reported in today’s press summary, at last week's crucial meeting of EU finance ministers, German Finance Minister Wolfgang Schäuble insisted that an EU Treaty revision is necessary to achieve a banking union, claiming that:

“We’ll only do this on a clear legal basis, because I don’t want risks in Karlsruhe.”

Somehow this announcement still managed to surprise people. But wasn't it always obvious? Anyone who is at all familiar with German history will understand why they're so keen to separate monetary policy from bank supervision. If keeping the two tasks with the ECB, such separation can only take place  if there's a rewriting of the EU treaties (so that the final say no longer rests with the ECB Governing Council). This also matters for non-eurozone countries as that guarantees them an equal say in the ECB supervision structure, and therefore makes them more likely to join (particularly Sweden and Denmark, which the Germans are keen on). Indeed, the Swedes - in a very brave moment - tried to push for just such a treaty change but dropped the idea. Further steps, such as a joint resolution fund, will also require treaty changes.

There are plenty of hurdles to fresh EU Treaty negotiations - some countries will want to avoid them like the plague - and even if the Germans can get them off the ground, the timing and scope (limited or full?), remains unclear. It is also still not fully clear whether the eurozone could circumvent the UK via an inter-governmental arrangement if the latter kicks up too much fuss.

But what's clear is that, in the land of ordnungspolitk, the idea of an EU treaty change is alive and well. So hör auf mit dem Blödsinn as the Germans would say.

The inbuilt political stand-off in the ECB's bond-buying programme

One of the many sub-stories of the Italian election is how it calls into question the ECB's bond-buying programme - the Outright Monetary Transactions (OMT). Not so much because of the ECB's ability to expand its balance sheet and stand behind Italy and Spain (though there's a clear cost to that). The reason is another one: unpredictable politics.

This is something we highlighted immediately following Mario Draghi's announcement to launch the OMT, in September 2012. We said:

"It will also be virtually impossible for the ECB to impose effective conditionality on debtor countries, meaning that the ECB can only hope that a series of unpredictable political decisions in member states will go in its favour."

To inject such conditionality, the OMT was linked to the European Stability Mechanism - the eurozone's permanent bailout fund - which comes with strict conditions (or at least is supposed to). To tap the OMT, a country has to be on an ESM programme. But, in effect, this made the OMT - despite it being run by an independent central bank - hostage to parliamentary and electoral politics.

As we argued in our analysis on the German Constitutional Court ruling on the ESM - a few days after the OMT announcement in September last year:

"...the ruling and the role of the Bundestag highlights that activating the OMT will be challenging, since in order to qualify for ECB bond-buying, a country must first get funding from the ESM – and be subject to conditions. If the Bundestag agrees to activate more bailouts, it will most certainly push for harsher conditions than what debtor countries – most importantly Spain – are willing to accept. In the long-term, under current arrangements of linking ESM and OMT, the latter is also effectively capped and subject to a Bundestag veto."

Well, enter the Italian elections (and Beppe). Discussing the election results, we told the Telegraph on Monday that:

“People have forgotten that the OMT cannot be triggered without a vote in the German Bundestag. This is going to be a huge problem, and we may be back to the political stand-off between the North and South of Europe,”

And in our flash analysis yesterday, looking at the Italian election results, we noted:

“A fragmented, anti-austerity Italian parliament could also make it far more difficult for the country to tap the ECB’s OMT. This is because it would need to access the European Stability Mechanism simultaneously, meaning a series of strict conditions – which Berlusconi and others could resist – and approval from several Northern Eurozone parliaments, including from the Bundestag.”

Other analysts are now waking up to this issue as well.

Then again, if it ever came to a point where Italy actually needed to tap the OMT, things might be so bad that politicians on both sides (probably during a panic-stricken weekend) could be scared into accepting whatever ESM-deal that could be struck.

But it all goes to show that in the eurozone, there's no escaping the politics.

What to expect from the EU in 2013

As 2012 draws to a close Open Europe has put out its take on what to expect from 2013. Reviewing our (admittedly milder) effort at this last year, shows that we didn’t do too badly, especially for what turned out to be a very volatile and difficult year for Europe (with plenty of government interventions, which are notoriously hard to predict).

See here for the full report where we lay out our view on three key topics to watch in 2013 – discussions of a ‘Brixit’, the formulation of the new eurozone banking union and, of course, the continuation or otherwise of the eurozone crisis.

Section 1: The eurozone crisis – survival but stagnation

2013 looks likely to be a calmer, but still painful year for the eurozone, with several political flashpoints (notably German, Italian and Austrian elections) that could quickly trigger a fresh flare-up in the crisis – particularly as many of the campaigns could become de factor judgements on the eurozone crisis and the bailouts. The eurozone is unlikely to fully turn the corner, with low growth and high unemployment continuing to plague many countries. Activism from the ECB is likely to help ease concerns, with its new bond buying programme the OMT potentially activated to aid Spain at some point. This will be needed as markets will still be on edge with Italy, Spain and France face funding costs of €332bn, €195bn and €243bn respectively.

Section 2: Banking union – slow or even slower?
A decision on the second step of the banking union – a joint fiscal backstop – is unlikely to be taken amid continued disagreements and domestic pressures. Even plans to have the ESM recapitalise banks already look to have been pushed back to 2014. During the year it may become increasingly apparent that, as is, the banking union does not represent a solution to the crisis.

Section 3: Britain in the EU – a mid-life crisis or full divorce?

We don’t see any fundamental changes to the relationship, but positioning and political manoeuvring will set the stage for the 2014 (European Parliament) and 2015 (General) elections – that in turn could decide the exact nature of the EU-UK relationship in the future. Two important issues to watch will be the opt out (and back into) EU crime and policing laws as well as the negotiations on the EU budget. The general tone of the debate within the government and Conservative party will be an important test ahead of the elections.

Obviously then, this is far from an exhaustive list but simply represents our thoughts on some key points of interest to watch in 2013. Feel free to share your thoughts for 2013 in the comments below!

Yesterday's Karlsruhe ruling: Good news for Germany and Europe?

Following yesterday’s ruling by the German Constitutional Court in which it gave the go-ahead to both the ESM and fiscal treaty, German politicians from all the main parties were tripping over-themselves to praise the Court and its ruling. Speaking in the Bundestag, Chancellor Merkel declared it “a good day for Germany and a good day for Europe” while Foreign Minister Guido Westerwelle praised “the [Court’s] wise decision in the pro-European spirit of our Constitution.” The SPD’s parliamentary leader Frank-Walter Steinmeier also welcomed ruling, in particular the additional participation rights for the Bundestag.

While some politicians - including those who had themselves lodged legal challenges - said they were disappointed, even politicians who have been among the fiercest critics of the euro-zone bailouts declared their satisfaction, with, for example, the FDP’s Frank Schäffler describing the verdict as a “victory for democracy”, claiming that with the imposition of the cap on German liability, “The ESM has lost its sharpest tooth”.

However, interestingly the German media has adopted a more sceptical tone altogether. For example, today’s Süddeutsche comments that:

“In their ruling, the judges clearly called out the risks of the euro-rescue but drew few consequences. Their reservations do not change the fact that Europe is moving together under great financial and political risks.” 

In a front page op-ed, Die Welt editor Thomas Schmidt draws in the ECB OMT bond-buying angle – something that we also cover in our analysis of the ruling - arguing that:

“The Court watches over German money and the issue of democratic legitimacy. It is clear that the ECB decision has opened the way into the bottomless transfer union in principle. It is equally clear that the legitimacy of the path towards the further deepening of European integration is poorly grounded. This must and will result in yet more legal challenges.” 

FAZ's economics editor Joachim Jahn describes the verdict as “a slap in the face of financial policymakers”, but warns that:

"With the requirement to secure a liability cap binding under international law, the judges have at least curbed the potential harm to the taxpayer… It is however questionable how much exactly the Karlsruhe order would be worth in an emergency. A protocol to the effect that Germany does not feel itself bound by alternative interpretations of the agreement is would be easy to obtain. Whether this would be considered material by the ECJ in the event Italy and Germany were to argue over reserve liabilities is by no means certain."

Last but not least to Bild Zeitung, whose chief editor Nikolas Blome argues that:

“The ECB’s [OMT] programme is perhaps well intended but not well executed. It is highly dangerous – and here the Court’s ruling changes nothing. The double whammy of the ESM and ECB is essentially so strong so as to be able to save every eurozone member. However, exactly this will lead all eurozone states into temptation: why enact painful reforms and brutal savings when it could be supposedly easier at the expense of the others, and Germany in particular?” 

The relief of Germany’s politicians is palpable, but the battle for the future of the euro – and the role of the ECB in particular – is still far from over.

The death of the Bundesbank? Germans come out swinging against ECB bond-buying

Although Jens Weidmann may have been alone on the ECB executive board in opposing yesterday’s ECB decision to buy government bonds, he looks to have the full-force of German public and media opinion right behind him. Over the last 24 hours, the German media, with surprisingly few exceptions, has fired a broadside against the ECB. No holds barred. Mario Draghi may have pleased markets, but he now has a very frustrated Germany – whose taxpayers are implicitly underwriting his institution (and the euro) – on his tail.

One of the most interesting reactions came from the Bundesbank itself, which unusually issued a public statement which ran directly contrary to the ECB’s decision. A Bundesbank spokesperson said:

Weidmann regarded the bond purchases “as being tantamount to financing governments by printing banknotes,” adding, “The announced interventions carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers.” 

Süddeutsche Zeiting’s Marc Beise has a blistering piece, crediting “Weidmann’s persistent opposition” as the reason why the ECB is ‘only’ buying short-term debt. But, goes on to argue, “Saving the euro is worth a lot of effort but there are two important limitations. A euro rescue at any price can be a disaster economically, that is the red line that must not be exceeded. The other limit is the law: never in a rules based community can the end justify the means. A Euro-community based on breached contracts will always be based on fragile foundations. On Thursday, the ECB has unfortunately crossed both these red lines.”

Meanwhike, Die Welt led with the headline “Financial markets celebrate the death of the Bundesbank”, adding, “For Germany, the nightmare begins. There it was: the word that everyone was waiting for: unlimited…ECB President Draghi brazenly breaks with the principles of German monetary policy.” Bild runs with a similarly eye-catching headline, warning against "Draghi's blank-cheque for debt-states".

FAZ's editor-in-chief Holger Steltzner also took a strong line, saying, “In the eurozone there isn't any division any more between monetary and fiscal policy…We should be curious to hear what the German Constitutional Court thinks about that.”

The warning on the German Constitutional Court is an interesting one (a topic we’ll discuss in future posts) but some politicians went even further, with Hessen Europe Minister Jörg-Uwe Hahn of the FDP and CDU’s Klaus-Peter Willsch (already the initiator of one of the ESM complaints to the German Constitutional Court) calling for the German government to seriously consider taking the ECB to the European Court of Justice for violating its legal mandate.

The ECB wasn’t the only institution on the receiving end though, with the German government and Chancellor Merkel also taking flak. Handelsblatt's deputy editor in chief, Florian von Kolf wrote, “Today is a black day for democracy…Merkel is silent…seemingly happy to have been partly relieved from her here Sisiphus task to save the euro”. DPA reports that SPD parliamentary leader Frank-Walter Steinmeier argued that the ECB’s decision is the “documentation of Chancellor Merkel’s failure...[while Weidmann] protests but Merkel gives the green light”, while the Green party decribed the CDU and FDP opposition as “hypocritical” since it was their failure to take any significant decisions on the crisis which forced the ECB to act.

We’ll continue to cover reaction throughout the day on the blog so stay tuned, but we can’t help but recall all those times we warned that saving the euro at any cost could drive a wedge between countries rather than bringing them closer together…

Germany faces some tough decisions on the ECB

As the next ECB meeting approaches on 6 September, the debate about potential ECB intervention is heating up. This past weekend was particularly interesting with two key German players weighing in with their views – even more importantly these views turned out to be increasingly divergent.

German ECB Executive board member Jörg Asmussen (on the right of the picture) revealed more details on potential ECB intervention yesterday, saying, “Under the framework of the new programme, the ECB will only buy bonds with short maturities,” adding the caveat that, “The whole discussion will be led by the requirement that any concerns about treaty-violating state financing are dispelled. We will only act within our mandate.” Asmussen also stressed that he would like to see any ECB intervention initiated in tandem with use of the eurozone bailout funds, saying, “The error with Italy…must not be repeated,” seemingly referring to the Italian government's failure to take full advantage of the time bought by the ECB over the past year.

Meanwhile, Der Spiegel has a lengthy and interesting interview with Bundesbank President Jens Weidmann, the other German on the ECB’s Governing Council, in which he renews his opposition to any greater intervention by the ECB, warning, “We shouldn't underestimate the danger that central bank financing can become addictive like a drug,” adding that proposals for ECB bond purchases were "too close to state financing via the money press”.

Together, these two men represent Germany at the ECB, so for them to strike such different tones is rather surprising (although it has been hinted at previously). Asmussen remains much more positive and supportive of Draghi’s position, while Weidmann takes a more traditional German stance against any prospect of monetary financing of government debt (a position which has garnered significant support with the German public).

The real question though, is who has the support of German Chancellor Angela Merkel? That remains unclear, particularly with both having previously been close advisors to Merkel. The Spiegel article suggests that Merkel has become somewhat impatient with Weidmann's strict ideological stance, especially as it begins to hamper a potential path to crisis resolution (at least in her eyes). However, last week Handelsblatt suggested Merkel had in fact decided to side with Weidmann over Asmussen.

If this divide continues, the issue will likely come to a head leading to some tough decisions for all involved – in fact any decision to sanction greater intervention would make Weidmann’s position in particular quite difficult. Choosing who to support will be a difficult political decision for Merkel which goes beyond just figuring out how best to solve the crisis – she must weigh the public response at home and abroad, the market impact, her relationship with ECB President Mario Draghi and her support within her own party and the broader German coalition. Asmussen also has to tread a careful line as, despite being independent, he risks seeing his influence and support within Germany decline rapidly. Weidmann, whom many have suggested has already become isolated, risks a similar erosion of support, although abroad and within the ECB rather than Germany. If greater intervention comes to pass, as seems increasingly likely, the spectre of his predecessors Weber and Stark, both of whom resigned from the ECB Council in protest, will undoubtedly loom large.

As we have noted countless times before the role of the ECB cuts right to the heart of the German approach to the eurozone. Expect plenty more developments on this front in the near future.

While everyone is talking about Greece...

It may sound incredibly obvious, but the eurozone crisis is not only about Greece. Yes, Athens may be facing its "last chance" (Juncker dixit) to save its euro membership. And yes, the diplomatic offensive launched by Greek Prime Minister Antonis Samaras (see picture) to obtain a two-year extension to the EU-IMF adjustment programme clearly deserves attention.

However, while everyone is talking about Greece, quite important (and not necessarily good) news is coming out of other eurozone countries - of which, as usual, we also offer a comprehensive overview in our daily press summary.

In particular:

• According to sources quoted by Reuters, the Spanish government is in talks with its eurozone partners about the eurozone’s temporary bailout fund, the EFSF, buying Spanish bonds – but has made no final decision over whether to request the assistance. Unsurprisingly, the European Commission said that there are no negotiations under way, and a bailout request from Spain is not expected "any time soon". Right...

• According to a high-ranking official at the Portuguese Finance Ministry quoted by Jornal de Negócios, Portugal (the 'forgotten man' of the euro crisis) will not be able to meet the EU-mandated deficit target of 4.5% of GDP for this year unless new austerity measures are adopted. The main reason seems to be the sharp fall in tax revenue: -3.6% during the first seven months of the year, as opposed to the 2.6% increase the Portuguese government was betting on for 2012. The alternative, the Portuguese press suggests, would be asking the EU-IMF-ECB Troika to relax the target. Boa sorte with that one, especially since in September we will hit the point where Portugal is within one year of being expected to return to the markets. Remember how the IMF's requirement for a country to be funded for twelve months played out in Greece... 

• A Cypriot government spokesman told reporters yesterday that the island's public deficit at the end of the year will be around 4.5% of GDP – significantly higher than the 3.5% of GDP initially forecast. Clearly not good news, as this will almost certainly increase the EU-IMF bailout Cyprus is currently negotiating. Another headache for the Troika, which is due to visit the island again shortly (although no clear date has been specified yet).

• New figures published by the Irish Central Bank show that €30.5 billion or 27.2% of the €112 billion outstanding in owner-occupier mortgages at banks in Ireland was in arrears or had been restructured at the end of June, up from €29.5 billion (26%) in March. Furthermore, German Finance Minister Wolfgang Schäuble told the Irish Times that he will oppose any debt-relief plan for Ireland that “generates new uncertainty on the financial markets and lose trust, which Ireland is just at the point of winning back.”

Add the German Constitutional Court ruling on the ESM treaty along with the Dutch general elections (with the EU-critic Socialist Party led by Emile Roemer ahead in the polls) into the mix and it really looks like there will be little room for boredom in September.

You're wrong, Signor Monti: National parliaments are not the problem - they're the solution

Italian Prime Minister Mario Monti has launched a diplomatic offensive in Germany, involving several interviews with the main German dailies. However, he made a faux pas while talking to German magazine Der Spiegel. Monti said,

"If governments allow themselves to be completely bound by the decisions of their parliaments without maintaining some room for manoeuvre in international negotiations, then a break-up of Europe will be more likely than closer integration."

Excuse us? An unelected technocrat instructing national governments to ignore their parliaments? Whatever Monti tried to achieve with these remarks, it didn't work. And he has already experienced a backlash in Germany, where if anything, there's close to a cross-party concensus over the need for giving the Bundestag more oversight not less, in the wake of the eurozone crisis and the multi-billion euro bailouts. The various rulings handed down by the German Constitutional Court during the eurozone crisis, demanding a stronger role for the Bundestag, also shows how Monti is messing with some pretty fundamental democratic settlements (see here, here, here and here).

Unsurprisingly, Monti has attracted criticism from across the German political spectrum. German Foreign Minister Guido Westerwelle (from Merkel's junior FDP coalition partner) said,

"Parliamentary control over European policy is out of any discussion. We need to reinforce, not weaken, democratic legitimacy in Europe."

Alexander Dobrindt, the Secretary General of the CSU (the Bavarian sister party of Merkel's CDU) was far less diplomatic,

"The greed for German taxpayer money is blossoming in undemocratic ways with Mr Monti...We Germans will not be prepared to eliminate democracy in order to finance Italian debts."

The deputy leader of the opposition SPD faction in the Bundestag, Joachim Poss, suggested that the "unspeakable Berlusconi years" had undermined the image of parliament in Italy, and added,

"The acceptance of the euro and its rescue is strengthened through national parliaments and not weakened." 

The en plein of rebukes was completed by the European Commission, with spokesman Olivier Bailly saying (have they started to learn?),

"The European Commission respects the competences of national parliaments."

All of this led Monti to clarify his stance in a communiqué:

"I just wanted to stress the need to maintain a continuous and systematic dialogue between [national] governments and parliaments, in order to make steps forward in the process of European integration." 

But Monti's remarks give testament to a most concerning elitist mentality, which has all too often been evident in the history of European integration: democratic scrutiny is a nuisance that should be avoided wherever possible. If he thinks that the Europe that emerges from the eurozone crisis can be built on backroom deals struck between a handful of EU leaders, under the radar of national parliamentary scrutiny, he may be in for some very unpleasant surprises. Continuing down that road will result in the rise and rise of some seriously populist, anti-EU parties as voters look for alternatives. The baby will have been thrown out with the bathwater.

National democracy is not only a matter of principle but also serves a practical purpose: actions and policies that enjoy democratic legitimacy have a far greater chance of standing the test of time. Therefore, national parliaments are not the problem in the eurozone crisis, they are a big part of the solution to it.

Ironically, as he struggles to push reform measures thorugh his own parliament, Monti may soon realise just how wide of the mark his comments were.    

IMF weighs in on the debate surrounding the ECB

There’s been another interesting report put out by the IMF today in the form of its ‘Article IV consultation on the euro area’ (essentially an economic assessment of the eurozone).

The IMF was particularly vocal on the role of the ECB stating:

“Because inflation is low and falling, the ECB has room for lowering rates, and deploying additional unconventional measures would relieve severe stress in some markets.” 

They’re not wrong there, any conventional inflationary pressure for the eurozone as a whole is definitely abating. But the policy implications of such a move are important. The IMF itself puts forward some alternatives, including:

Further liquidity provision. This could encompass additional multi-year LTRO facilities, coupled with adjusted collateral requirements, if needed—including a broadened collateral base and/or a lowering of haircuts—to address localized shortages. The associated credit risk to the ECB would be manageable in view of its strong balance sheet and high levels of capital provisioning. Nevertheless, one of the disadvantages of the LTRO facility is that it tends to strengthen sovereign-bank links (see Box 5).

Quantitative easing (QE). The ECB could achieve further monetary easing through a transparent QE program encompassing sizable sovereign bond purchases, possibly preannounced over a given period of time. Buying a representative portfolio of long-term government bonds—e.g., defined equitably across the euro area by GDP weights—would also provide a measure of added stability to stressed sovereign markets. However, QE would likely also contribute to lower yields in already “low yield” countries, including Germany. 

As you’ll notice both recommendations come with clear caveats – strengthening the sovereign banking loop with the LTRO and the fact that QE would need to be spread across the entire eurozone. We’ve discussed both at length on this blog and in our research but a refresher never hurts.

The LTRO has certainly driven the sovereign banking loop much closer, engraining this connection at the heart of struggling economies (far from ideal) while encouraging the nationalisation of financial markets once more. All this prompted the well-known and incredibly complex banking union discussion. The IMF also notes a further problem with more LTROs, asset encumbrance. A complex issue but essentially banks are running short of quality assets to post as collateral to borrow from the ECB (see graphic below). So even if further LTROs were offered they may not be able to take advantage of them. If the ECB went down this route and faced this problem it would have little choice but to widen its collateral rules or reduce the valuation ‘haircuts’ (which decide how much banks can borrow against certain collateral) thereby taking even greater amounts of risk onto its balance sheet.

 
In terms of QE we’d point you to our report from December and the table below. Ultimately, it would have to be a huge spate of QE to provide enough of a boost to the countries in trouble, but that would also create a huge amount of money flowing into countries such as Germany (which is already concerned about an asset and property bubble).

We’ve argued before that a more significant role in the crisis for the IMF wouldn't be the worst thing in the world. Generally it has provided a more realistic assessment of the situation. Unfortunately, in this case, the problems outlined above are only the technical ones relating to a greater role for the ECB, the political obstacles remain almost insurmountable in the short term. As with the UK government, we’d recommend the IMF engage but avoid spending too much time of policies which are politically nearly impossible and technically challenging.

The Karlsruhe factor, Part IV

Throughout the eurozone crisis, we have often highlighted the gap between the kind of ‘shock and awe’ decisions expected by financial markets, and what national democracies are able to deliver. Nowhere has this been more evident than in the on-going constitutional tug-of-war between the German government and the country’s Constitutional Court (see here, here and here for background). The latest chapter concerns a series of legal challenges against the ESM and fiscal treaty, on the basis that they violate the sovereign budgetary rights of the German Parliament.

The stakes are very high given that the Court could, in theory, strike down the best part of Merkel and Schäuble’s efforts over the past year. It is unlikely that the Court will do so given the ramifications, but at Tuesday’s public hearing, the judges (pictured in their traditional red robes) indicated that they would take their time before issuing a ruling; up to three months to decide on whether to issue a temporary injunction pending a full decision on constitutional compatibility early next year.

This delay is most unwelcome news for Merkel who is desperate to reassure financial markets and other political leaders that Germany is serious about the eurozone rescue, which is why she expended a lot of political capital in pushing the two treaties as a package measure through the German parliament in record quick time, and was angry that after all that German President Joachim Gauck refused to give his assent after the Court asked him to allow them time to consider their legality.

The problem is that the Court was specifically designed – by the British and the Americans no less - to counteract the concentration of power and rash decision making by other federal institutions, a sort of systemic circuit breaker. It is for this reason it is tucked away in sleepy Karlsruhe, the opposite end of the country to Berlin and previously Bonn.

The question of urgency vs caution has led to deep divisions not only within the German government but also the wider political and constitutional establishment. Ahead of the proceedings, Justice Minister Sabine Leutheusser-Schnarrenberger (FDP) said that:

“Government and politicians should stay out of this completely. The Constitutional Court does not need any advice... Judges are also aware of the importance that their decision will have on the economy.”

However, addressing the Court directly, Finance Minister Wolfgang Schäuble warned that:

“A considerable postponement of the ESM… could cause considerable further uncertainty on markets beyond Germany and a substantial loss of trust in the eurozone's ability to make necessary decisions in an appropriate timeframe”.

Meanwhile the Guardian reports that Chancellor Angela Merkel allegedly told a private meeting of her CDU party that the Court was “pushing the limits” of her patience, while Martin Schulz, the President of the European Parliament complained that some of the Court’s verdicts are "characterized by great ignorance”. Conversely, Bundesbank President Jens Wiedmann, also giving evidence, warned that “a quick ratification is no guarantee that the crisis will not escalate further".

The graphic below shows how Germany’s major political figures have found themselves at odds over the Court ruling, with figures from all parties adopting a range of positions on the issue:

The German media on the other hand have presented a broadly united front, with Die Welt noting that the Court’s eventual ruling will determine “How far European integration can go without damaging the democratic substance of Germany”. A leader in German tabloid Bild argues that “It is totally right that the constitutional judges take more time – after all, the question is whether Germany is overburdening itself financially. That would be a lot worse than short term turbulences on the financial markets”, while in centre-left broadsheet Süddeutsche Zeitung, Heribert Prantl argues that:

“Karlsruhe has to find the ways and means by which Europe can continue to be built without breaking the foundations of the constitutional settlement. The success of this search is existentially vital for Germany and the EU. It is more important than the fleeting applause of the so-called markets in return for a quick decision.”

While the Court, even in the opinion of some of the litigants, is not expected to torpedo the eurozone rescue at this stage (although they take a slightly more pessimistic view over on FT Alphaville), the red lines of the existing constitutional settlement are looming ahead, with most forms of debt pooling that many have called for - such as Eurobonds or a banking union - lying on the opposite side. As the debate over the future of the eurozone will continue to rumble on, expect further tension in the broadly consensual model of German politics between further European integration on one hand and preserving the current constitutional settlement on the other.