“The issue that arises here is how much of this decline is due to the OMT announcement and how much is the result of developments in the fundamentals – government debt, external debt, competitiveness, growth, etc. – that influence the spreads. This question is important. If the decline of the spreads is primarily the result of improved fundamentals, then the need for the OMT programme can be questioned. More generally, if the spreads are mainly driven by fundamentals, the ECB has no business in trying to influence these spreads as these can only decline with an improvement in the fundamentals. This is also the position taken by the German Constitutional Court. The latter declared OMT to be illegal and referred the case to the Court of Justice of the European Union with the demand that conditions be imposed on the OMT programme that would render it ineffective and useless. The main argument in the German judges’ ruling is that the spreads reflect underlying economic fundamentals. Attempts by the ECB to reduce these spreads are attempts to counter the view of market participants. In so doing, the ECB is in fact pursuing economic policy – an activity that falls outside its mandate.”
Apart from the question of whether the issue raised can be adjudicated upon in the terms set out by the German constitutional court, it did not
rule OMT to be illegal under EU law. It raised the near certainty in its ruling that in its opinion that it was but referred the case to the ECJ, a first for the court. Under the treaties, the ECJ is solely responsible for adjudicating what is or is not illegal under EU law. The German court has, however, invented its own “ultra vires” rule which in essence means that it views itself as holding the last word on certain issues which, in its view, contravene the German constitution.
It remains to be seen what the ECJ will decide and whether, in the light of this, the luminaries of the German constitutional court will need to decide to pull the pin out of the OMT grenade.
The opinions of the two dissenting judges will certainly be in the spotlight at that point.
“There is one important difference, however. In the US and the UK, the government exercises control over the central bank, i.e. in times of crisis it is the government that will force the central bank to provide liquidity.
When the sovereign in these countries is threatened, it will prevail over the central bank. This is not the case in the eurozone. In the latter, the governments depend on the goodwill of the ECB to provide liquidity. They have no power over the ECB and cannot force that institution, even in times of crisis, to provide liquidity. Thus, in the eurozone today, there is a
primacy of the central bank over the sovereigns.
This is a model that cannot be sustained in democratic societies. The ECB consists of unelected officials, while governments are populated by elected officials. It is inconceivable that these governments will accept to be pushed into insolvency while unelected officials in Frankfurt have the power to prevent this but refuse to use this power. When subjected to a
true test, such a model of the governance of the eurozone will collapse and rightly so”.
The general conclusion that might be drawn is twofold; (i) markets are always right, by definition, if for unjustified reasons and (ii) courts in general, and especially the German constitutional court, should stick to stick to their legal lasts.
4 replies on “De Grauwe and Ji on those yields”
Enda Kenny’s take on yields:
http://www.cnbc.com/id/101676143
From the paper;
“The issue that arises here is how much of this decline is due to the OMT announcement and how much is the result of developments in the fundamentals – government debt, external debt, competitiveness, growth, etc. – that influence the spreads. This question is important. If the decline of the spreads is primarily the result of improved fundamentals, then the need for the OMT programme can be questioned. More generally, if the spreads are mainly driven by fundamentals, the ECB has no business in trying to influence these spreads as these can only decline with an improvement in the fundamentals. This is also the position taken by the German Constitutional Court. The latter declared OMT to be illegal and referred the case to the Court of Justice of the European Union with the demand that conditions be imposed on the OMT programme that would render it ineffective and useless. The main argument in the German judges’ ruling is that the spreads reflect underlying economic fundamentals. Attempts by the ECB to reduce these spreads are attempts to counter the view of market participants. In so doing, the ECB is in fact pursuing economic policy – an activity that falls outside its mandate.”
Apart from the question of whether the issue raised can be adjudicated upon in the terms set out by the German constitutional court, it did not
rule OMT to be illegal under EU law. It raised the near certainty in its ruling that in its opinion that it was but referred the case to the ECJ, a first for the court. Under the treaties, the ECJ is solely responsible for adjudicating what is or is not illegal under EU law. The German court has, however, invented its own “ultra vires” rule which in essence means that it views itself as holding the last word on certain issues which, in its view, contravene the German constitution.
http://www.spiegel.de/international/europe/german-court-calls-ecb-bond-buying-into-question-a-952556.html
It remains to be seen what the ECJ will decide and whether, in the light of this, the luminaries of the German constitutional court will need to decide to pull the pin out of the OMT grenade.
The opinions of the two dissenting judges will certainly be in the spotlight at that point.
http://www.bverfg.de/en/press/bvg14-009en.html
“There is one important difference, however. In the US and the UK, the government exercises control over the central bank, i.e. in times of crisis it is the government that will force the central bank to provide liquidity.
When the sovereign in these countries is threatened, it will prevail over the central bank. This is not the case in the eurozone. In the latter, the governments depend on the goodwill of the ECB to provide liquidity. They have no power over the ECB and cannot force that institution, even in times of crisis, to provide liquidity. Thus, in the eurozone today, there is a
primacy of the central bank over the sovereigns.
This is a model that cannot be sustained in democratic societies. The ECB consists of unelected officials, while governments are populated by elected officials. It is inconceivable that these governments will accept to be pushed into insolvency while unelected officials in Frankfurt have the power to prevent this but refuse to use this power. When subjected to a
true test, such a model of the governance of the eurozone will collapse and rightly so”.
This legal commentary of interest.
http://eutopialaw.com/2014/02/21/does-germany-need-a-political-questions-doctrine/#more-2393
Also this earlier paper by De Grauw.
http://www.voxeu.org/article/economic-flaws-german-court-decision
The general conclusion that might be drawn is twofold; (i) markets are always right, by definition, if for unjustified reasons and (ii) courts in general, and especially the German constitutional court, should stick to stick to their legal lasts.