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Europe: The Noose Tightens, But On Whom?

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    September 16, 2012

    Ambrose Evans-Pritchard has an interesting piece in The Telegraph regarding the German constitutional court’s upholding of the ESM with conditions.

    Pritchard often takes a contrarian view, and with near-unanimous opinions that the court caved in, he has a different view.It’s the kind of post that makes you stop and think, which is why I keep reading Ambrose, even though we frequently clash over monetary policy.Pritchard claims German Constitutional Court tightens the noose yet further.
     Just as it gave the go-ahead for Maastricht, Lisbon, the Greek rescue, and the EFSF bailout fund with a “Yes, but” with the ‘but’ mattering most in the end — Karlsruhe has now endorsed the European Stability Mechanism (ESM) with strings attached as well.

    It has done so only under conditions that will greatly complicate EMU rescue politics in the future.

    Here are some instant thoughts. I will be writing at greater length about the court later today for the newspaper.

    Germany’s ESM share is capped at €190bn, so what happens if Spain and Italy are forced to step out of the rescue machinery because they themselves are in too much trouble to fund the mechanism?

    The Court made it clear that Germany will not automatically pick up the slack.

    “The Federal Republic of Germany must clearly express that it cannot be bound by the Treaty establishing the European Stability Mechanism in its entirety if the reservation made by it should prove to be ineffective.”

    This matters. It may well be tested.

    The Court also killed off any idea of a banking licence for the ESM, viewed as crucial to give it adequate firepower.

    “As borrowing by the ESM from the European Central Bank, alone or in connection with the depositing of government bonds, would be incompatible with the prohibition of monetary financing entrenched in Article 123 TFEU, the Treaty can only be taken to mean that it does not permit such borrowing operations.”

    And it laid down some markers on the ECB’s Draghi Plan for bond purchases:

    “An acquisition of government bonds on the secondary market by the European Central Bank aiming at financing the Members’ budgets independently of the capital markets is prohibited as well, as it would circumvent the prohibition of monetary financing.”

    As for the bigger picture, here is the crucial point:

    “The German Bundestag is prohibited from establishing mechanisms of considerable financial importance which may result in incalculable burdens with budget significance being incurred without the mandatory approval of the Bundestag.”

    “In this context, the Bundestag, as the legislature, is also prohibited from establishing permanent mechanisms based on international treaties which are tantamount to accepting liability for decisions by free will of other states, above all if they entail consequences which are hard to calculate.”

    Target2 Liabilities

    Pritchard goes on to discuss Target2, and on that score he appears to be in exact agreement with what I stated in German Court Approves ESM While Ruling “No Unlimited Liability, Parliament Must Approve Changes in Ceiling”; Sigh of Relief Reaction.

    He also caught something I didn’t:

    An acquisition of government bonds on the secondary market by the European Central Bank aiming at financing the Members’ budgets independently of the capital markets is prohibited as well, as it would circumvent the prohibition of monetary financing.

    But does that matter?

    With everyone but the Euroskeptics cheering the decision, Pritchard claims the “Noose Tightened“.

    After thinking about that for a while, I have a number of questions.

    Questions for Ambrose

    1. Noose tightens on whom?
    2. Do the politicians care?
    3. Going one further, do the pro-euro advocates hope the noose tightens forcing Germany as quickly as possible into a no-win solution?
    4. What indication is there the politicians simply will not raise the ceiling?
    5. What indication is there that the constitutional court will do anything about things if the EU, ECB, or Bundestag oversteps their bounds?


    By the time the anyone even recognizes the “noose has tightened” it will be far too late to do anything rational about the situation (which brings to the forefront bonus questions).

    Additional Bonus Questions

    1. Is that the nannycrat plan all along?
    2. Isn’t death by hanging still death?
    3. Is there any escape for Germany?

    The answer to 6 is probably not, at least according to Occam’s Razor. However, regardless of how you feel about conspiracy theories or the answer to question 6, the answer to 7 is “yes”, and the sad answer to question 8 is “no”.

    The best course of action for Germany and the EU is for Germany to exit the eurozone now.

    Unfortunately, as a result of a pathetically wimpy ruling by the constitutional court that is 100% guaranteed to lead to “noose tightening“, Germany will face the eurozone exit question at a time when the consequences of that decision, no matter which way Germany chooses, will be far more painful than they are today.

    Thus, the answer to my primary question “Noose Tightens, But On Whom?” is German citizens, not misguided or stubborn politicians out to make history.

    Please thank Chancellor Merkel for this sad state of affairs. Had she spoken out against Draghi’s foolish plan the court would likely have killed it, and German citizens would have had the referendum they deserved.

    For a discussion as to why the OMT cannot possibly solve anything, please see Monti Warns Italian Unions; Over 200,000 Jobs at Risk; Italy’s Insane Labor Rules.

    Mike “Mish” Shedlock
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    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.