Debt crisis: ECB hauled before Karlsruhe court

Starting on June 11, the German Constitutional Court will examine whether the European Central Bank exceeded its powers by creating the European Stability Mechanism (ESM). Once again the eurozone is waiting with bated breath for another decision in Karlsruhe.

No piss***. Building not as stable as it looks.

On trial are the ECB’s bond purchases of over-indebted euro-zone countries. Can the Central Bank really buy unlimited bonds of the malefactor states to save the euro, as ECB President Draghi announced ("whatever it takes")? Were the bank’s actions in pursuit of monetary policy, or in pursuit of the prohibited funding of states, the opinion of Bundesbank President Weidmann?

In fact, the ECB is beyond the jurisdiction of the German Constitutional Court. After all, European institutions may act only if they are authorised by the member states to do so. The Constitutional Court could decide that the ECB is exceeding its competencies in buying up bonds of individual eurozone countries in a “legal act that does not respect the limits of the EU’s legal powers”, for which it is mainly the German taxpayer that is liable – and this without any parliamentary authorisation, and without even asking the Bundestag.

Confronting the key arguments

The Constitutional Court could also pass the case on to the European Court of Justice. The outcome of that would be clear: when the Irish Supreme Court brought the ESM before the Luxembourg judges, they waved through the permanent rescue fund.

In its urgent decision on the ESM, Karlsruhe permitted the bailout fund, on condition that the Bundestag participate in it, but criticised the bond purchases: the purchase of government bonds by the ECB, “which is intended to finance the budgets of member states independently of the capital markets, is also prohibited as a circumvention of the prohibition of monetary financing of the budget."

In Karlsruhe, the case concerns not only Draghi's bond programme, the OMT, whose name – "outright monetary transactions" – implies that monetary policy should be safeguarded before the first bond is purchased. It also concerns state funding under previous ECB President Trichet, when the ECB bought up a good €230bn worth of bonds from Italy, Spain, Ireland, Portugal and Greece.

To mollify the Court, the ECB has, in its statement of its position, pointed out a limit on the allegedly unlimited purchases of bonds; a small win for the Bundesbank can be seen there. One can also wonder how binding such a limit is, when that limit was never decided on by the ECB’s governing council. A comparison of the key statements taken from the position statements of the ECB and the Bundesbank illustrates the conflict: the irreversibility of the euro will be guaranteed within the mandate, says the ECB. The current composition of the monetary union, considering the sovereignty of the nation-states, cannot in any case be guaranteed by the Federal Reserve, says the Bundesbank. In some member states, monetary policy cannot bring its full effects to bear, says the ECB. Different market interest rates do not conflict with a single monetary policy, says the Bundesbank.

The position statement of the European Central Bank shows how the bank itself became a prisoner of the rescue policy by getting drawn into the politics. It is not in the remit of the ECB to preserve the state of the monetary union forever. Different interest rates for countries and companies across the eurozone do not imply any failure, but are, rather, an expression of the degree of risk sensed by market participants based on their judgment of creditworthiness and the state of the economies. When a central bank systematically intervenes in favour of individual countries to provide lower interest rates for a state, the fiscal policy then involves redistribution.

The argument that the ECB can take any losses is peculiar. In the event of a break-up of the eurozone, the equity capital of the ECB would drain away faster than Draghi could follow it. What’s more, how can the purchase of bonds constitute a monetary policy if that purchase is subordinate to the constraints of the bailout funds?

In the example of Greece, the Bundesbank reveals how the “lack of alternatives for actions to be taken by the central banks" becomes a self-fulfilling prophecy. Even though the terms and conditions of the aid package were not complied with and the finance ministers put a stop on further commitments, Athens did receive further financing.

In the meantime, even the International Monetary Fund admitted its error ) and stressed that Greece cannot pay its debts. In Ireland and Cyprus as well, the central banks have let themselves be pressed into the service of the politicians. In Ireland the central bank is financing a fifth of the country’s economic output; in Cyprus, the Eurosystem is financing up to 60 per cent. Higher interest rates, which hypocritical politicians on the campaign trail like to demand, casting an eye at the votes of worried savers, are impossible, because otherwise "rescued" countries would begin to sink under. ( Fonte: www.presseurop.eu)

Translated from the German by Anton Baer