A post on the the Fibs and Waves blog by “Blankfeind” outlines the actual legal case against the OMT. I believe the case is rock solid. How the German constitutional court rules in two days is another matter.
Please consider The ECB Thumbs Its Nose At The Law.
On September 6th, the ECB announced its Outright Monetary Transactions program, known as OMT. Justified as a means for the ECB to repair monetary policy transmission and to recreate the singleness of monetary policy for the euro area, the OMT offers an unlimited commitment by the ECB to purchase short-term (one to three year) sovereign debt in the secondary markets for sovereigns who agree to certain conditions.
The bond purchases themselves will not be conducted by the ECB, but rather by the national central banks in proportion to their capital key with the European Central Bank. Hence, should Spain eventually fall under the OMT program, it will be the German Bundesbank that will be responsible for purchasing the largest single share of Spanish bonds.
But, is OMT legal under the treaties that govern the ECB?
The letter of the law:
Treaty on the Functioning of the European Union (TFEU)
Article 123 (ex Article 101 TEC)
1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
With the OMT program, the ECB has essentially said that any European Monetary Union sovereigns unable to obtain favorably priced credit from the market may apply to the ECB in order to obtain that credit in unlimited quantities, albeit via debt purchases in the secondary market.
This clearly means that the ECB will have established a credit facility in favor of the sovereign participating in the OMT program, and that is an explicit violation of the letter of the law.
Primary vs. Secondary Markets and Intent of the Treaty
Former ECB president Jean-Claude Trichet (and one of the original architects of the treaties that created the eurozone), opened up this can of worms by allowing the ECB to buy bonds in the secondary market.
Since the ECB could act as the end party immediately buying bonds from the original buyer, there is in practice virtually no difference between buying bonds in the primary and secondary markets.
Here is the loophole Trichet exploited:
Article 123 (ex Article 101 TEC)
1. … Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
Clearly, that could not possibly be what the treaty intended. When discussing the intent of the treaty, the ECB is already in violation. Now Draghi has gone a step further.
“Blankfeind” continues …
Germany demanded the inclusion of Articles 123 and 125 of the Treaty on the Functioning of the European Union with the clear intent of protecting itself and its citizens from responsibility for the fiscal failings of other member states. Hence, OMT violates the intent of the applicable laws.
The OMT program is in violation of both the letter and the intent of Article 21 of Statute of the European System of Central Banks and of the European Central Bank and of Article 123 of the Treaty on the Functioning of the European Union (TFEU).
“Blankfeind” is certainly correct. And I point out the obvious creep in unconstitutional acts. Trichet capitalized on one misplaced word and debate over the intent of “directly” giving Draghi a bit of cover to even more blatantly break the law.
Why Bond Buying Undermines Democracy
In a direct criticism of “Draghi Almighty” Der Spiegel explains Why ECB Bond-Buying Plans Undermine Democracy
Anyone who breaks a law can hardly excuse his actions by claiming that he is acting within the scope of the law. In any case, it won’t help him much — unless his name is Mario Draghi and he is the president of the European Central Bank (ECB).
Draghi wants more, though; he wants to save the European common currency at all costs. The euro, he says, is “irreversible.”
So far, the ECB has already spent over €200 billion ($256 billion) buying sovereign bonds from crisis-stricken euro-zone countries. If the exception now becomes the rule, additional bonds worth hundreds of billions could quickly follow. German taxpayers are also ultimately liable for this amount — without the German parliament, the Bundestag, having a say.
This Wednesday, Germany’s Federal Constitutional Court is expected to decide whether the European Stability Mechanism (ESM), the permanent successor to the current rescue fund, is compatible with the German constitution. It is seen as likely that the judges will put a ceiling on Germany’s liability. But in view of the latest ECB decision, such limits are already useless before they have even been enacted. The ECB apparently stands above the Bundestag and above the Federal Constitutional Court.
And what is the German government doing? It’s playing a double game. It supports both the ECB president as well as his main critic, Weidmann. Merkel is secretly pleased with Draghi’s initiative because the chancellor would probably not be able to gain majority support in the Bundestag for additional euro rescue programs. That’s why she is among those saying that the ECB is acting within the scope of its mandate.
If she said anything else, she would have to take action. She could, for example, file a suit with the European Court of Justice in Luxembourg in a bid to have the ECB decision nullified. The Bundestag could also pass a resolution calling for such a lawsuit — and thus force Merkel to put her cards on the table.
But if there are no plaintiffs, no judges will intervene. In such a situation, Mario Draghi is the most powerful man in Europe, undeterred by courts or parliaments.
The euro may be irreversible, but apparently democracy is not.
That is exceptionally harsh criticism of both the OMT and of chancellor Merkel from a magazine that is generally quite pro-euro.
Is Draghi Above The Law?
The answer to that question is obvious. He thinks and acts like he is. This should not be surprising. It is one of the direct corollaries of the Fed Uncertainty Principle, which I wrote on April, 3, 2008, long before the Fed started its big power grab.
What I said about the Fed applies equally to the ECB and central bankers in general. Here are key excerpts.
Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.
Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three:
Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
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