Monday, September 10, 2012

The upcoming German court decision on European bailout funds

Michael Moran in Watch on the Rhine: A German Decision on the Euro Slate 09/10/2012 gets just enough right about the upcoming German Federal Constitutional Court decision on Germany's participation in European bailout funds but also manages to be muddled enough to provide that old fingernails on the blackboard feeling.

This displays a little of both:

This week brings another inconvenient intervention by “national institutions” in the workings of the multinational Eurozone, that portion of the even larger European Union that uses the euro as its currency. On Thursday, Germany’s constitutional court will rule on whether the creation of a EUR 700 billion “rescue fund” to bail out tottering member states like Ireland and Greece is a violation of Germany’s own national constitution, known as the Basic Law. ...

This has the potential to cause an enormous legal train wreck – in essence, a restart moment for the European debt crisis that would be a major shock to already jittery global markets. Many legal experts expect a fudge, assuming the justices know an outright ruling against the ECM would cause havoc. Markets would tumble, the euro with it, and it could just be the straw that breaks the Eurozone’s back.
Melodrama doesn't work very well in evaluating possibilities for the eurozone's immediate future. Paul Krugman wrote several weeks ago that the euro crisis reminded him of a description of an earlier financial crisis in Mexico that it took forever, and then it took one night.

What he means is that the crisis has been visibly present to just about everyone who looked since 2009. At some point, if the EU economies continue in recession and the more fundamental problems of the currency union aren't fixed, a panic will get rolling, most probably with a surge of withdrawals from Spanish banks and shadow-banking institutions which will cause the eurozone to unravel at stunning speed. Thanks to German Chancellor Angela Merkel's policy of doing just enough to stop an immediate collapse, they've been skating on the edge of such an event for some time now.

But the European Central Bank (ECB) announcement last week that they would be doing massive purchases of short-term bonds from troubled countries like Spain and Italy was a big short-term boost. A German court decision against the bailout funds could set off an immediate panic, but the ECB action has just provided short-run hope that could largely offset an overnight disaster. Moran describes that action this way, saying that the ECB "intervened with soothing words about supporting Spain and other troubled EZ countries by buying their sovereign bonds – in effect, lending them money."

Uh, no, announcing a massive bond purchasing program may not stave off the end of the euro for long in itself, but it's way more than "soothing words." And what does he mean by bond purchases being "in effect, lending them money"? In effect? Buying bonds is lending money to the bond seller, normally with interest.

Another head-scratcher is, "Unlike US Supreme Court justices, Germany’s highest court has regularly backed the notion that international laws and treaties can override constitutional concerns in some cases." Say what? Not to be nit-pick or anything. But those of us who remember that there is more in the US Constitution than the second half of the 2nd Amendment also know that this part of the original text are binding law:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding. [my emphasis]
Obviously, there can be legal issues relating to treaties. But treaties ratified by the Senate are clearly specified there as part of the "supreme Law of the Land" on a level with the text of the Constitution itself.

And how does he imagine that the following would be a solution?

Greece, and possibly others, need selective reintroductions of their old national currencies, giving them the ability to devalue, cheapen their exports, lower labor costs and regain competitiveness -- all with a path back to rejoin the larger bloc if they meet certain goals. At very least, this gives them ownership of their own problems, a first step to incentivizing real solutions.
I suppose by "selective reintroductions" of national currencies that only some countries would reintroduce them. But we know from Argentina's largely successful experience in bailing out of a currency/debt/austerity trap in 2001-2, it would take a decade or more for countries readopting their own currencies to fully recover from the current debacle. And unless their level of productivity and per capita wealth had reached something like German levels, why would they even consider going back into the same trap? If if they did achieve those levels, it would be reckless to go back into a currency union like the present one. Only one that was a real fiscal and transfer union is viable over the long term.

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