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.

Germans stick to their guns on data retention

As we've noted before, the Germans take privacy and civil liberties seriously, and have refused to implement the EU's Data Retention Directive (the first part of the Directive was meant to have been implemented in 2007 the second part in 2009). There's a lot of history here. Two years ago, the German Constitutional Court ruled the implementing law of the Directive unconstitutional, which in turn triggered the current stalemate.

As the Germans continue to drag their feet, the European Commission has now proposed that the ECJ impose a daily penalty of €315,037 on Germany until it implements the Directive. However, Süddeutsche reports that the liberal FDP Justice Minister Sabine Leutheusser-Schnarrenberger is sticking to her guns and is still refusing to implement the law - something which is increasingly straining relations within the German ruling coalition, with CDU/CSU MPs, and CSU Interior Minister Hans-Pieter Friedrich in particular, less keen to make a stand on the issue than the FDP.

This is becoming a very interesting test case for a potentially new-found German assertiveness in Europe, though it's not alone on this on this one. Sweden, Austria and Romania have gone into this Directive kicking and screaming, but it's definitely Germany that is offering the most resistance at the moment. More widely, of course, this is an interesting example of an EU member state unilaterally refusing to accept an EU law what it goes against the country's fundamental political and constitutional settlement.

A bit of European political dynamite in the Queen's Speech

The Queen delivered her "Queen's Speech" earlier today - which, for non-UK readers, isn't her speech at all but rather the government's, setting out its agenda for the forthcoming year (a rather odd ceremony but good opportunity to see Ken Clarke in a wig if nothing else).

For those interested in the ever-so-opaque EU dimension, the Queen said in passing:

"My Government will seek the approval of Parliament relating to the agreed financial stability mechanism within the euro area."

And

 "My Government will seek the approval of Parliament on the anticipated accession of Croatia to the European Union."

The latter won't be much of an issue - most MPs will play along as further enlargement rightly enjoys buy-in across the political spectrum.

The former is a different story. This relates to the EU treaty change dating back to December 2010, when the Germans managed to get agreement for tweaking the Lisbon's Treaty Article 136 to allow the eurozone's permanent bailout fund, the ESM, to be put on a more legally sound footing (at least that's how Berlin sees it). This treaty change has now finally come up for UK ratification in Parliament. Before carrying on, just to clarify, this is not the EU treaty change that Cameron vetoed in December 2011, and which gave rise to the separate Fiscal Treaty.

The December 2010 agreement didn't cause a whole lot of fuss at the time, and MPs gave their preliminary approval. Back then, Cameron had far greater control over both events and his own backbenchers. And the UK media was still waking up to the massive - and ongoing - continental political shift unleashed by the euro crisis.

2012 is a different matter altogether.

The ESM won't actually impact on the UK itself, so the 'referendum lock' wouldn't kick in. However, the treaty change that Cameron vetoed back in December wouldn't actually have had a direct impact on the UK either - that veto was about getting guarantees that UK interests were protected as the eurozone integrates further, and the rules of the game are effectively changed.

Exactly the same logic could apply to the Treaty change to put the ESM on legal footing. Like the Fiscal Treaty, the ESM will lead to greater integration in the eurozone (indeed, the two go together - see here), so Tory MPs could use the same line of reasoning they did leading up to the December summit in calling for the UK to block the measure, in return for EU concessions. Remember, an EU treaty change is not a change at all until it has been ratified by all member states.

Will they? So far, there are no signs that this issue is fully on MPs' radar and the UK government prays it will stay that way. But a lot of things to look out for:

• The UK government is likely to sell the measure as a guarantee that it will never again be forced to indirectly contribute to eurozone bailout funds - a few papers have already run with that story. At the same December summit, Britain won a political declaration and an EU decision that the article that forced it to contribute to the EU-wide bailout funds, the EFSM, won't be used again (Article 122 - for background, see here and here). However, the legal status of this guarantee is uncertain. It is not part of the treaty change itself, and MPs may argue that a guarantee that isn't anchored in the Treaties could well prove ineffective. After all, the UK has received guarantees before which proved to be pretty worthless (clue: Charter of Fundamental Rights, Working Time Directive). If MPs wake up to the legal ambiguity underpinning the 'guarantee' they may ask for something firmer in return for ratifying the treaty change.

• The timing of the ratification will be crucial, i.e. if it coincides with some cataclysmic event or political row in Europe (there will be a few to choose from), it would make life potentially much more difficult for the UK government. The ratification certainly won't happen before the summer' that's for sure. 

• Under the current agreement between eurozone leaders, the ESM is supposed to be up and running by 1 July (in parallel with the temporary bailout fund, the EFSF). This is important, because without the ESM in force, the lending capacity of the euro bailout funds will be a lot lower than markets are expecting, meaning more market nervousness, in particular as Spain is struggling.  

• To make matters even more complicated, the treaty change itself isn't actually what's needed to approve the ESM in eurozone countries - for that, eurozone leaders have agreed a separate 'ESM treaty' which is now going through national parliaments in the eurozone. As you'd expect, this is by no means plain sailing as the treaty - for obvious reasons related to taxpayers' cash - is subject to controversy in Germany and the Netherlands, which are still to ratify it. Before the ESM treaty can become operational and lend money to countries and banks, it needs to be approved by eurozone countries accounting for at least 90% of the contributions to the fund (meaning that Germany, France, Italy and Spain have an effective veto).

• And this is where things get rather bizarre.  Even if all euro countries manage to ratify the ESM treaty, the Germans originally said that they absolutely need the separate EU Treaty change for the ESM to be fully legal. However, since the UK won't have ratified the EU treaty changes by 1 July, the ESM will be up and running before the 'vital' Treaty change designed to make the whole construction legal is actually ratified in national parliaments. In other words, expect another batch of court cases to soon land in the in-tray of the German Constitutional Court in Karlsruhe.

Pretty messy - but then again, we're talking eurozone politics and EU 'law'. That one short line in the Queen's Speech hides so many complications...

Eurozone bailouts in the dock

Whenever there's a new, big EU-related initative, say a Treaty or a new bailout fund, you know that one thing will follow: a legal challenge at the German Constitutional Court - the Bundesverfassungsgericht, or BVerfG. And when the heavyweight Court rules, Europe holds its breath (see here, here, here, here, here, here, here and here for example). The Court's rulings on the Maastricht Treaty, the Lisbon Treaty and, most recently, the eurozone bailouts have very much set out the parameters for further EU integration.

While taking the German Constitution, or Basic Law (Grundgesetz) extremely seriously, the BVerfG usually opts for the 'here but no further' approach, and have never fully overturned an EU measure, though it did have some strong things to say about the Lisbon Treaty, while also striking down the German law that implemented the EU's Data Retention Directive. Likewise, the Court has made the introduction of Eurobonds, should it ever come to that, far more complicated (see here for background).

As the Bundestag gears up to ratify both the euro's permanent bailout fund, the European Stability Mechanism, and the German driven 'fiscal treaty' on budgetary discipline within the eurozone, get set for another series of launches. Interestingly, today, we learn from Der Spiegel that none other than former German justice minister Herta Däubler-Gmelin - from the Social Democrats - has said she will bring a legal challenge to the Court against both the ESM and the 'fiscal treaty' on behalf of the 'More Democracy' campaign group, on the basis that the budgetary sovereignty of the Bundestag is being threatened. She claims that the EU plans "cross a red line", and that:

"I'm all for Europe, but not for a Europe that is determined only by the governing elites… It can not be that Europe takes away the rights of national parliaments, without strengthening the European Parliament and the participation rights of citizens accordingly. Europe must be democratic."

We hear you Herta.

Less surprisingly, Germany's far-left party, Die Linke, and CSU MP Peter Gauweiler (a regular litigator) are planning legal challenges as well.

Some people seem to have this strange idea that even in a crisis, the rule of law should be upheld (yes, we are being sarcastic).