One puzzling aspect of ECB president Mario’ Draghi’s Outright Monetary Transactions (OMT) plan to save the eurozone is his doing so before the German constitutional court had approved the ESM.

In spite of Draghi’s emphasis on conditionality, OMT puts Germany directly at risk in an unlimited way. This modification to the ESM makes the constitutional case against it much stronger.

I am not the only one who feels that way. Even the pro-bailout Eurointelligence site sees it that way.

Here are some snips from the Eurointelligence Daily Briefing report A new legal case against ESM – that links Draghi’s OMT to the current case

This is the week in the which the German constitutional court will announce the most important ruling in its history. Herbert Prantl reports in Suddeutsche Zeitung on a new anti-euro case this morning that links last week’s decision by the ECB to start Outright Monetary Transactions (OMT) to the current ESM case. The case was brought by Peter Gauweiler, a well-known Eurosceptic member of the Bundestag from the Bavarian CSU, and a serial litigator. Gauweiler argues that the OMT had fundamentally altered the ESM, and that the decision on the ESM should therefore be postponed (meaning a delay in the ratification by Germany). He also makes the legal points that the OMT decision did not constitute a breach of competence, but a permanent assumption of competences. When the Bundestag voted on the ESM, it did so under different circumstances. With the OMT, the Bundestag’s authority is permanently circumvented.

Spiegel Online reports on the increased nervousness in Berlin ahead of the court’s ruling. It says the government really has no Plan B in the event of a No vote, and remarks that the court is likely to take Gauweiler’s case very seriously, plus the fact that 37,000 citizens have joined the case (in a kind of class-action constitutional lawsuit). It also quotes views among top coalition MPs who have expressed misgivings about the ECB’s decision.

(Gauweiler’s motives are transparent, but the legal argument is quite strong in our view. The entire euro rescue effort is legally tenuous, and hard to square with what we already know about the German constitutional court’s interpretation of the Treaties, and its views on the scope and limits of financial crisis management. We know out of experience that it is always wrong to second-guess this fiercely independent court. The only thing we do know, in contrast to many financial market participants, is that the court will not take into account the financial market reaction of its decision.)

Draghi’s Fatal Mistake?

I certainly do not agree with Draghi, but the man clearly is not a dunce.  Was there a strong reason to announce OMT, altering the ESM, before it was approved?

Certainly, yields went into the stratosphere a few weeks ago. Yet, mere talk of rate caps and unlimited bond buying had yields collapsing last week.

Did Draghi feel he could not wait another week? Did he see a need to strike first, fearing the court may otherwise have laid down guidelines against his OMT?

Perhaps Draghi wanted to bring this all to a head right here right now, the sooner the better, even if it meant the court might rule on the need for a referendum.

From that aspect, (and from the point of view of the pro-bailout crowd) the sooner Germany has a referendum, the more likely it would pass.

A year ago I think a referendum would have passed with flying colors. Now 54% of Germans Want the Constitutional Court to Kill the ESM.

With each passing day, more Germans are upset at the economy and the bailouts on top of it (see Germany Trifecta: Steep Drop in Construction New Business, Services New Business, Manufacturing New Business) and an increasingly large group want Germany out of the eurozone completely.

Perhaps we should not overthink this.

Occam’s Razor suggests Draghi simply made a mistake in failing to see the bitter response from Germany and the potential implications down the road.

I had been thinking the court would easily approve the ESM, but with reservations. However, the OMT changed the odds quite a bit. Regardless, we are going to find out one way or another in two days.


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Mike “Mish” Shedlock
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