38 thoughts on “Mody: Did the German court do Europe a favour?”

  1. The OMT initiative, as originally put forward, envisaged the purchase of bonds out to 3- years maturity, conditional on a recipient country being in an adjustment programme and hence made a monetary policy decision dependent on fiscal policy. The legality of that proposal is a moot point and was opposed by some ECB council members but all seem to be in favour of QE , including the unconditional purchase of government bonds at much longer maturities across the whole euro area. Is OMT now irrelevant?

  2. just another one of this hilarious attempts to ignore “strict conditionality”, “within our mandate”

  3. These links are informative in terms of helping to get to the political point.

    http://www.economist.com/news/finance-and-economics/21596570-european-monetary-policy-has-not-been-given-reprieve-markets-believe-it-isnt

    http://www.bruegel.org/nc/blog/detail/article/1240-omt-ruling-karlsruhe-says-no-refers-to-ecj-and-suggests-ecb-should-always-be-preferred-creditor/

    As the Economist points out, “At this level of judicial jousting, realpolitik rather than the strict letter of the law prevails”. The fact of the matter is that it is not the job of the German constitutional court to interpret EU law (the views of the dissenting judges is of interest in this context), still less to seek to dictate to the court whose job it is to do so – the ECJ – what its judgement should be. When and if the showdown comes, presumably in the light of the judgement of the ECJ, the choices available to the German authorities will, it is to be hoped, have become clearer.

    One could suitably be acceptance by the German constitutional court of the role of the ECJ under the treaties to which the German government is party. If it fails to do so, it will be faced with the same dilemma since its initial judgement on the Maastricht Treaty i.e. whether to continue to fudge this core issue or to bring matters to a head.

    In the meantime, the markets seem to have taken the involvement of the courts at their appropriate measure, given the implicit political commitment of the countries that have adopted the euro, and notably Germany, “to do what it takes” to maintain it; without anything that could be viewed as approximating to a formal fiscal union. How to do this remains the burning question.

  4. Mody lost me at: “…the author is grateful to Kevin Cardiff….” With an opening like that, I suppose that I shouldn’t be surprised that the closing paragraph includes this gem: “That guarantee may never be needed.” If he really wants to “focus minds” and clarify who bears costs then he’d do well to assume that any guarantee which is issued will in fact be called.

    I’m not sure Mody intended this, but to me it reads like a “heighten the contradictions” kind of argument: make Europe look into the abyss, in the hope that we’ll all be shocked into doing the sensible thing. A hundred years after the countdown to World War I, that doesn’t strike me as good advice.

  5. DOCM,

    whom else can you cite to be on record to have your opinion, that the Bundesverfassungsgericht could not find on this matter?

    Dan,

    Sabine Lautenschläger at the ECB has come out clearly that QE would be only an instrument for emergencies, and that we are very far away of that.

  6. @ francis

    FYI

    Article 19 Treaty on European Union

    1. The Court of Justice of the European Union shall include the Court of Justice, the General Court and specialised courts. It shall ensure that in the interpretation and application of the Treaties the law is observed. Member States shall provide remedies sufficient to ensure effective legal protection in the fields covered by Union law.

    3. The Court of Justice of the European Union shall, in accordance with the Treaties:

    (a) rule on actions brought by a Member State, an institution or a natural or legal person;

    (b) give preliminary rulings, at the request of courts or tribunals of the Member States, on the interpretation of Union law or the validity of acts adopted by the institutions;

    (c) rule in other cases provided for in the Treaties.

  7. @Dan

    Could you give us a source for this?

    “…was opposed by some ECB council members but all seem to be in favour of QE , including the unconditional purchase of government bonds at much longer maturities across the whole euro area.”

  8. @Kevin O’Rourke

    Do you have any comment on Ireland’s most recent GDP growth figure and, in particular, how it compares with Iceland’s. (Ireland +4.1%, Iceland +0.0%)

  9. One of the reasons for Ireland joining the euro was the belief that a German-backed currency would lead to sound money, low inflation and a stable exchange rate, in contrast with any UK-backed arrangement, or link to it by Ireland, would lead to printing money by the bucket-load, high inflation and continual currency depreciation. Sound money and low inflation are necessary, although not sufficient, requirements for healthy economic growth.

    This is now being borne out. In the UK and Northern Ireland there has been an explosion in prices in recent years following on from the post-2007 devaluation of the UK currency. People in Britain are not too badly hit by this, but people in Northern Ireland are, since incomes are much lower and have totally failed to keep up with the explosion in prices.

    The following are the changes in prices for a range of items in Ireland and in the UK/N. Ireland between June 2007 and June 2014 (from Eurostat).

    bread: Ireland + 1.8%, UK/NI +36.5%

    meat: Ireland +0.2%, UK/NI +44.1%

    fish: Ireland -5.1%, UK/NI +38.4%

    milk, cheese and eggs: Ireland +15.1%, UK/NI + 31.4%

    fruit: Ireland -10.3%, UK/NI +39.8%

    vegetables: Ireland -9.8%, UK/NI +31.1%

    chocolate + confectionery: Ireland +0.7%, UK/NI +44.8%

    non-alcoholic beverages: Ireland +3.4%, UK/NI +31.5%

    alcoholic beverages: Ireland +3.5%, UK/NI +25.1%

    maintenance of dwellings: Ireland -10.4%, UK/NI +24.9%

    gas: Ireland +24.6%, UK/NI +80.5%

    electricity: Ireland +36.9%, UK/NI +52.4%

    water: Ireland -3.8%, UK/NI + 29.8%

    education: Ireland +44.6%, UK/NI +90.2%

    furniture: Ireland -34.8%, UK/NI +14.1%

    carpets: Ireland -24.9%, UK/NI +25.7%

    books and newspapers: Ireland +10.1%, UK/NI +30.5%

    vehicles: Ireland: -20.9%, UK/NI +2.7%

    postal services: Ireland +10.1%, UK/NI + 78.3%

    equipment for recreation and culture: Ireland -14.2%, UK/NI +22.6%

    sports equipment: Ireland -24.6%, UK/NI +0.9%

    plants and flowers: Ireland -22.8%, UK/NI +15.1%

    hotels and guest-house: Ireland -29.5%, UK/NI + 10.6%

    clocks and watches: Ireland -25.5%, UK/NI +29.6%

    The relative price stability is one of the reasons why the Ireland’s economic growth is accelerating sharply. Competitivess v the UK is improving sharply. Those economists who want ireland out of the euro rarely mention the explosion in prices that would occur from tying any new Irish currency to the UK currency.

  10. Just to be clear: many of the Irish figures are negative (-). Its not typos. Thank you Ms Merkel for these figures.

  11. Those Irish economists advocating that Ireland exit the euro and link to sterling are becoming a joke. One of them recently published a book advocating that Ireland exit the euro and link to sterling. The same economist forecast in his blog in June 2013 that house prices would fall another 80% from their June 2013 level before stabilising. Enough said. If Ireland didn’t exit the euro during the recession and when it had lost some competitiveness v the eurozone, its hardly likely to exit now when growth is accelerating and competitiveness has been restored. The campaign on the part of some Irish economists to take Ireland out of the euro is well-past its sell-by date, is now a lost cause, and those same economists should pack it in.

  12. @JohnTheOptimist

    Very Useful Figs. Ta.

    Do you have the Figs for “wages” in the same period?

  13. On Mody’s paper

    Kevin Cardiff, Karl Whelan, Thomas Pringle ….

    Rigid Rules, as beloved by the Deutsche, can be very dangerous …. Cf the Mann Gulsch disaster ….

    Of course, the real problem is that the ECB(undesbanke) is NOT a PROPER CENTRAL BANK.

    If ECJ follows the ‘Ruulles’ it will come out against OMT.

    Prefer PRINCIPLES meself – tack with the winds.

    Surprising that the Germanii still haven’t figured out, or progressed to, ‘principles’ – As Caesar put, evolution for some takes time …. some of us cannot wait another 1000 years. Time to take on the Germans and their ‘Ruulles’ ….

  14. @francis

    A little bit complex – you need to go to Eurostat database – here is link:

    http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home

    Then, once inside database:

    click on ‘Statistics’ (at top)

    then click on ‘harmonised index of consumer prices’ (in list)

    then click on ‘Database’ (at left-hand-side)

    then click on “HICP monthly indices’

    Then you click on options for the countries selected, months selected, items selected – it will then display the HICP indices for those months and you have to calculate the change between the two months yourself (so, if it gives 104.2 for June 2007 and 112.8 for April 2014, change is +8.3%).

    It makes no difference to the analysis, but the figures I gave were between June 2007 and April 2014 (not June 2014 as I said – the figures for June 2014 have been published by Ireland’s CSO and UK’s ONS, but not yet in Eurostat database – they should be there soon)

  15. It makes no difference to the analysis, but just in the interests of accuracy, here are corrected figures for change in prices in Ireland and UK between June 2007 and April 2014 (not June 2014, as I mistakenly said) – when I posted them last night, I couldn’t find my calculator, so calculated the changes between June 2007 and April 2014 in my head – found calculator this morning, so redid them – virtually no significant differences

    bread: Ireland + 1.7%, UK/NI +35.0%

    meat: Ireland -5.6%, UK/NI +36.4%

    fish: Ireland -4.6%, UK/NI +34.0%

    milk, cheese and eggs: Ireland +17.0%, UK/NI + 29.9%

    fruit: Ireland -10.2%, UK/NI +38.9%

    vegetables: Ireland -10.1%, UK/NI +27.1%

    chocolate + confectionery: Ireland -0.8%, UK/NI +45.5%

    non-alcoholic beverages: Ireland +3.4%, UK/NI +30.8%

    alcoholic beverages: Ireland +3.3%, UK/NI +23.3%

    maintenance of dwellings: Ireland -10.0%, UK/NI +22.8%

    gas: Ireland +22.5%, UK/NI +78.8%

    electricity: Ireland +28.4%, UK/NI +51.5%

    water: Ireland +0.2%, UK/NI + 29.9%

    education: Ireland +43.4%, UK/NI +88.6%

    furniture: Ireland -35.1%, UK/NI +7.1%

    carpets: Ireland -24.6%, UK/NI +25.1%

    books and newspapers: Ireland +11.0%, UK/NI +30.0%

    vehicles: Ireland: -20.7%, UK/NI +3.4%

    postal services: Ireland +10.3%, UK/NI + 84.3%

    equipment for recreation and culture: Ireland -14.7%, UK/NI +22.3%

    sports equipment: Ireland -25.0%, UK/NI +1.2%

    plants and flowers: Ireland -22.6%, UK/NI +15.0%

    hotels and guest-house: Ireland -25.8%, UK/NI +11.8%

    clocks and watches: Ireland +17.3%, UK/NI +39.9%

    games and toys: Ireland -40.0%, UK/NI -8.2%

  16. As noted by other posts the ECB will only undertake QE if it deems further measures are required to prevent inflation staying too low for too long. So it may not emerge but it is clear that such a policy has been agreed in principle, at least according to Draghi;

    see http://www.ecb.europa.eu/press/pressconf/2014/html/is140508.en.html
    or any recent press conference for he following statement;

    ‘ The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate in order to cope effectively with risks of a too prolonged period of low inflation’

    As for the type of assets that may be purchased see this speech by Benoit Coeure, an Executive Board member;

    http://www.ecb.europa.eu/press/key/date/2014/html/sp140413.en.html

    including the following

    ‘In practice, purchases would naturally be linked to the interest rate maturities that are most important for firms’ and households’ investment and consumption decisions. In the euro area, this tends to be the intermediate to longer part of the yield curve’

  17. @ DMcL

    The legal luminaries both in Luxembourg and Karlsruhe will, no doubt, have read the comments in question and notably the following in the speech by Couere.

    “Second, if such easing is called for, the Governing Council is unanimous in its commitment to use also unconventional instruments within its mandate. The question we face is whether asset purchases would be the appropriate unconventional measure . And if we deem that asset purchases would be appropriate, the question then becomes how we could implement such a policy in way that is useful and that complies with our mandate.

    This means, among other things, ensuring that any such purchases comply with the Treaty, keeping in mind that Article 18 of the ESCB Statute allows the ECB and national central banks to operate in the financial markets by buying and selling outright claims and marketable instruments. It also means guarding against operations that unduly distort market allocations or worse, that would have intended distributive effects. And it means designing a programme that is effective given the financial structure of the euro area – where, for instance, bank-based intermediation is pre-dominant and wealth effects through equity and real estate prices are less important transmission channels than, say, in the US.”

    The irrelevance of legal intervention on OMT in circumstances where (i) no action has yet actually been taken (ii) any action, if and when it is taken, will be clearly designed to avoid any provable suggestion of monetary financing and (iii) will be unanimous (i.e. with German support), is evident.

    The ECJ is likely to make haste slowly in the circumstances.

  18. JtO,

    thanks a lot for your help. These EU databases are unbelievable. The people who write the interfaces seem to have their head wired very different from mine, things are constantly changing.

    And you lost me at the point of “HICP monthly indices’
    I clicked around at a number of similar item, and got either an error, or no item specific data. I am not doubting your data pull, but I would be very interested to get there for myself.

    I am using Google Chrome, and you ? This could explain something.

    But price deltas of average / median 32%, this is really brutal, so far my picture of the UK was 4 years of plus 1 – 1.5 % of more inflation.

    Dan,

    I think it is safe to say, that “Germany”, whatever that means here, has agreed in principle, that under certain circumstances some kind of QE could be done

    DOCM,

    thanks a lot for the very interesting Czech case link.

  19. going off topic for a moment, to cheer folks up

    1. http://www.youtube.com/watch?v=2T21kbsvSpU

    Singapore Manpower Minister „laughing all the way to the bank“

    Trade Minister is in search of the script writer : – )

    selecting Germany “injected a sense of realism in our messaging, since no one will bet on a potentially losing team.”

    posted on July 9th !

    and related to Merkel’s 60th :

    http://www.der-postillon.com/2014/07/barack-obama-schenkt-angela-merkel-zum.html

  20. “The irrelevance of legal intervention on OMT in circumstances where (i) no action has yet actually been taken (ii) any action, if and when it is taken, will be clearly designed to avoid any provable suggestion of monetary financing and (iii) will be unanimous (i.e. with German support), is evident.”

    Or alternatively, not evident at all.

    (i) After OMT has been announced and before it has been implemented is precisely the right time to litigate it. Carefully timing litigation for when OMT is implemented in the middle of a renewed crisis would be daft.

    (ii) There has been a fairly good case made that it’s not possible to undertake effective OMT actions in compliance with the treaties. No doubt, the folks involved will do their best to avoid provable monetary financing, but their best may not be good enough if it is just not possible.

    (iii) Unanimity between governments and the view of the German government are not of much relevance to compliance with the relevant treaty articles.

  21. And since I was recently misled by the evil Microsoft spellchecker to call seafoid a misogynist,

    instead of the proper “misanthrope” : – ) ROFL

    I just want to remind you , that anglish is my second language, with :

    IF I HAD A HAMMER – Angela Merkel about her English skills back in DDR

    http://www.youtube.com/watch?v=51M1A9qj8qE

    before exploiting the 2 link limit, and test Kevin’s tolerance : – )

    Putin spricht Deutsch / Putin speaks German 1/3
    http://www.youtube.com/watch?v=2FRVOPGwXf0

    starting 2:42

  22. The exact circumstances when QE would be countenanced would be “when Hell freezes over” or when Crazy Jens is sent to his room. Whichever is sooner.
    DOD,
    I see your pals in the Ukraine up to no good.

  23. @Tull

    Had a chat with Paddy Zhukov in Kharkov yesterday. The situation of the Russian speaking population is dire. Villages and towns are subject to artillery and bombed from the air – many civilian casualities.

    The Azov brigade, neo-nazi, and the far right svoboda recruits are essentially involved in ethnic cleansing and all they want to do is kill Russians. Amazing that Poroshenko has gone this direction – must be with tacit approval from Nuland & the US, especially those corporates who want the IMF dosh so that they can annexe the key resources from The Oligarchs who are set to make billions from this – the dosh will only arrive when the East is ‘pacified’ – hence the brutality unleashed by the Oligarchs.

    Local Russians are dismayed that Putin is sitting on the fence – and the US sanctions – for what was a US inspired and funded ‘regime change’ – are simply war against Russian by other means. The lessons of Bosnia have not been learned – and the EU is toothless: Merkel parties at 60 while European civilians are bombed and die. Poroshenko, and the ruthless jewish oligarch who masterminded Odessa masacre, must love Israel as the world media focuses on the disasterous situation in the Gaza concentration camp.

    I’ll link to a good explanatory geopolitical piece on the macrofinance from Michael Hudson in a following post. I have no detail on the Vincennes_esque nature of the latest disaster in that area …

  24. @tull fyi

    Financial War in Ukraine [h/t nakedcapitalism]

    No to currency slavery

    July 10, 2014
    By Michael

    From RT news

    Western support will allow more IMF and European lending to prop the Ukrainian currency so the Ukrainian oligarchs can move their money safely to British and US banks, economist and author Michael Hudson told RT’s Truthseeker.

    RT:Could you summarize for us the tried and tested steps that will lead from IMF loans, to Ukraine’s best assets ending up in private Western hands – the IMF’s ‘knee-breaker’ role as you memorably described it as?

    Michael Hudson: The basic principle to bear in mind is that finance today is war by non-military means. The aim of getting a country in debt is to obtain its economic surplus, ending up with its property. The main property to obtain is that which can produce exports and generate foreign exchange. For Ukraine, this means mainly the Eastern manufacturing and mining companies, which presently are held in the hands of the oligarchs. For foreign investors, the problem is how to transfer these assets and their revenue into foreign hands – in an economy whose international payments are in chronic deficit as a result of the failed post-1991 restructuring. That is where the IMF comes in.

    The IMF was not set up to finance domestic government budget deficits. Its loans are earmarked to pay foreign creditors, mainly to maintain a country’s exchange rate. The effect usually is to subsidize flight capital out of the country – at a high exchange rate rather than depositors and creditors getting fewer dollars or euro. In Ukraine’s case, foreign creditors would include Gazprom, which already has been paid something. The IMF transfers a credit to its “Ukraine account,” which then pays foreign creditors. The money never really gets to Ukraine or to other IMF borrowers. It is paid to the accounts of foreigners, including foreign government creditors, as in IMF loans to Greece. Such loans come with “conditionalities” that impose austerity. This in turn drives the economy even further into debt – forcing the government to tighten the budget even more, run even smaller budget deficits and sell off public assets.

    http://michael-hudson.com/2014/07/no-to-currency-slavery/

  25. @ BCT

    It is evident; if one considers certain facts, rather than simply what appear to be your opinions.

    I refer you to the link on the Czech case that I posted above which gives the background to why the German constitutional court referred the matter to the ECJ for a preliminary ruling (top of page 967); “Prior to the acceptance of an ultra vires act, it must also give the Court of Justice the opportunity to rule on the validity and interpretation of the contested measure.”

    In short, it is hoist on the petard of its own legal logic in the Honeywell case. Tending to confirm this is the fact that that it has not sought an urgency procedure for consideration by the ECJ of the matter (as was the case with Pringle, if I am not mistaken).

    The matter appears to be, to my layman’s eye, under a kind of sub judice rule.

  26. @ BCT

    As a postscript, one could add that this is not the only topic on which the German constitutional court can be said to be hoist on its own petard and one which is also related to the question of the euro. In its Lisbon judgement, the court came to the conclusion that the European Parliament was not a parliament in the real sense because such required adherence to the principle of one man one vote (which is rather odd given that Germany is a federal republic and such does not apply to federal second chambers in general, including the Bundesrat).

    This largely justified its ruling that the minimum threshold that applies to federal elections in Germany did not apply to European elections and the court rejected even the attempt by the politicians to find a middle ground by agreeing a 3% rather than the standard 5% hurdle.

    http://www.bbc.com/news/world-europe-26351565

    This opened the door to the AfD, the party that has been dubbed, appropriately, the German Tea Party! It is vehemently anti-euro; while being in favour of the EU!

  27. @ BCT

    It is evident; if one considers certain facts, rather than simply what appear to be your opinions.

    I refer you to the link on the Czech case that I posted above which gives the background to why the German constitutional court referred the matter to the ECJ for a preliminary ruling (top of page 967); “Prior to the acceptance of an ultra vires act, it must also give the Court of Justice the opportunity to rule on the validity and interpretation of the contested measure.”

    In short, it is hoist on the petard of its own legal logic in the Honeywell case. Tending to confirm this is the fact that that it has not sought an urgency procedure for consideration by the ECJ of the matter (as was the case with Pringle, if I am not mistaken).

    The matter appears to be, to my layman’s eye, under a kind of sub judice rule.

  28. I think the points I made above are reasonable based on the facts.

    On the subject of my opinions … My opinion of DOCM’s contributions on this topic is that whatever faction in the ECB he or she represents thinks it needs to add exigencies of crisis to its real legal arguments in order to persuade the Court to approve OMT. My opinion is that it therefore wishes to avoid litigation until crisis can again give extra weight to its arguments.

Comments are closed.