It has become something of a sport for leading German academics and others who are opposed to Germany handing over largess - as they see it - to their Southern European neighbors, to bring actions before the German Constitutional Court to block bailouts in various shapes and forms. The chief target has been the ESM, the European Stability Mechanism, or 500 billion euro bailout fund. In late September the German constitutional court capped Germany's contribution to the ESM at 190 billion. To exceed this figure, the Court ruled, the German Chancellor and her finance minister would have to go back to the Federal Parliament and seek its approval, which, of course, would be no easy hurdle to clear.
When Joachim Gauck, the German President (a largely symbolic position), followed up the Court's decision by signing a bill ratifying Germany's participation in the ESM (the last member country to do so) this was widely heralded in the financial and mainstream media as a great success, clearing the way for Europe to launch its permanent bail out fund. However, as Elliott Wave Marketing notes in a highly perceptive article, the German Constitutional Court's decision has a few wrinkles that the mainstream press is ignoring, and that could yet come home to roost. Moreover, to get the point of the court's capping off of Germany's contribution at 190 billion euros, you need to get a sense of how big Germany's potential commitment to the eurozone is.
I (recently) spoke to Professor Markus Kerber, who is one of the German academics that led the action placed before the Court on behalf of about 37,000 citizens. The Constitutional Court was asked to block presidential ratification of the German parliament’s approval of the ESM. Central to his case was the rapid increase in the bailout costs faced by Germany. Kerber told me that in the deposition to the court, the estimated costs for which Germany would be liable and that can be substantiated are in the order of 2 trillion euros, with further commitments of 1.7 trillion euros in the pipeline. This is in stark contrast with a similar action bought before the court a year ago, where the costs appeared to be only 170 billion euros. That action was rejected on the grounds that Germany could effectively afford it, in the view of the judges. So it was entirely logical that they ruled that the German President could ratify parliamentary approval of the ESM, so long as Germany’s contribution is capped at the level authorized by parliament at 190 billion euros."
The point, of course, is that 190 billion euros is a drop in the ocean. The fantasy behind the ESM is that all nations will contribute according to their ratio of contributions to the European Central Bank, which puts Germany at 27%. However, asking Italy, or indeed, Greece, Portugal or Ireland, to contribute their full share to a Spanish bailout looks just a tad problematic since four are about as close to skint as you can get. And France? It's budget deficit is 6% and growing and its total debt to GDP is startling.
The real spanner in the works, thrown in by the Constitutional Court's judgement, is its ruling that the ESM may only use funds directly contributed to it and may not leverage that debt with further borrowings. The Court correctly sees that if the ESM were allowed to raise bonds, say, on the capital markets, Germany, as the probable last man standing, would find all those bonds landing on its doorstep. So with no ability to borrow, and being underfunded on any reasonable reckoning, the ESM is not exactly looking man enough for the job that is being assigned to it. What is the likely outcome? For the author of Elliott Wave Marketing Services, there is only one alternative, the ECB can decide that it will ignore the German Constitutional Court's ruling, since the Court has no jurisdiction over the ECB. That will infuriate the Bundesbank, but then Draghi has shown an increasing willingness to tread on Bundesbank toes, with some success recently. If this happens the ECB can be expected to print like billy-oh, monetizing Europe's debts at a spanking pace, and driving the euro into a competitive devaluation spiral. That, the author argues, will put the German public and politicians into a flat spin. They are not prepared mentally, philosophically or constitutionally to engage in another bout of hyper-inflation. And that, the author suggests, is when German politicians are highly likely to take Germany out of the euro. It's one scenario, but quite a scary one...
Further reading on the eurozone crisis:
- Building a European union – the benign crisis theory keeps on trucking, by Anthony Harrington
- Solutions to the Current Crisis, by Jean-Claude Trichet
- Markets two, European democracy zero – the dawn of the zombie technocrats, by Anthony Harrington
Tags: Angela Merkel , Elliott Wave , ESM , German chancellor , German Constitutional Court , German Federal Parliament , German President , Joachim Gauck