The heart of this battle goes to the Maastricht Treaty which formed the Eurozone. The Treaty says there will be no commingling of debts. And the German court ruled the ECB’s QE program overstepped its bounds and did just that.
However, the European Commission, led by Ursula von der Leyen, claims that EU law holds precedence over national regulations.
The European Court of Justice’s rulings are binding for courts in the 27 member states of the block says the EC.
Thus, a major fight looms as the European Commission Threatens Germany with Legal Action.
“The recent ruling of the German Constitutional Court put under the spotlight two issues of the European Union: the euro system and the European legal system,” Leyen said in a statement.
“We are now analysing the ruling of the German Constitutional Court in detail. And we will look into possible next steps, which may include the option of infringement proceedings,” she said.
Infringements are legal cases the Commission can bring before the Luxembourg-based Court of Justice of the EU, if the Brussels-based executive deems a member state is violating EU law. The court can order a nation to make amends, or face hefty fines.
Landmark Court Ruling
Eurointelligence explains What it Means for the Future of the EU.
The ruling raises complex and potentially troubling issues for the EU as a whole. The German constitutional court has accused the ECB and the CJEU, the court of Justice of the European Union, of abusing their power, and of acting beyond their assigned competences. That concept is known in German constitutional law as acting ultra vires. In the German legal interpretation of European integration, all sovereignty still rests with the member states. The EU is clearly not a federal state, but a deferred power. Member states have transferred certain rights to the EU. The German court said it accepts that it is bound by CJEU rulings, but only those that occur within the EU’s agreed competences. All bets are off it the CJEU goes ultra vires. And, crucially, the German court decides if and when that happens.
This is the most serious challenge to the EU’s legal framework we have yet come across. In the UK, the courts operated under the assumption that conflicts between EU and UK law would always be settled on the basis that EU law is supreme.
The ruling is unusually explicit about the breach of competences on the part of the CJEU. It criticised the CJEU’s positive ruling on the asset purchases as implausible, and objectively arbitrary. It accused the EU court of an evident neglect to investigate the wider consequences of the ECB’s programme. The word evident crops up many times in the ruling. It is a legally more loaded word than it appears at first sight. Moreover, the ruling accuses the CJEU of a breach of EU treaty law.
The German court’s interpretation will have important consequences if other national courts follow suit, which we think is very likely. Poland’s deputy justice minister already declared that member states have regained their position as the masters of the EU treaties. We expect the ruling to strengthen the determination by the Polish government to press ahead with judicial reform, and to resist interference by the EU into what they consider domestic legal affairs.
Debt Mutualization
What Germany fears now and has from the outset is “debt mutualization” in which Germany would bailout Greece, Spain, Portugal, and Italy.
That is why Germany insisted the Maastricht Treaty, which founded the Eurozone, prohibit debt mutualization.
Germany Has Had Enough
Time and time again, politicians and the ECB found ways to chip away at the treaty.
And despite the German court ruling, Pablo Iglesias, Spain’s Deputy PM. says a “certain [level of] debt mutualisation is a [necessary] condition of the [continued] existence of the EU”.
Eurozone Breakup Risk at New High
Of course, the ECJ would rule that it is the high law of the land.
But then what? Fines against Germany?
Precisely who will enforce them? How?
This setup prompted my May 8 post: Eurozone Breakup Risk at New High
Bluff? Does it Matter?
I suspect the court case is a bluff and will never see the light of day. The EC will instead hope this all goes away, but it won’t.
Things will keep simmering until they boil over.
Meanwhile the number of boil-over points has just risen. Add Germany to the stew.
Mish
Everyone in Europe is trying to conquer Europe through law and finance.
An amusing side outcome is that the English, in response to Barnier, will point at the German constitutional court position.
The more I read on the ruling, the more decided it seems. That is to say some sort of document dump on the government by the Bundesbank of ECB practice is not going to come close to meeting requirements, even if the ruling could be lifted within three months
“German constitutional organs, administrative authorities and courts may participate neither in the development nor in the implementation, execution or operationalisation of ultra vires acts. Following a transitional period of no more than three months allowing for the necessary coordination with the Eurosystem, the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. On the same condition, the Bundesbank must ensure that the bonds already purchased and held in its portfolio are sold based on a – possibly long-term – strategy coordinated with the Eurosystem.”
Worth reading through the whole interview below to understand the sort of direction the ECB is likely approaching from
Germany is transferring its wealth to Italy and Spain through ECB purchases of bankrupt bonds (as you noted in your earlier article). If I were Italy and Spain, I’d increase my bond issuance as much as possible now. The ECB will buy those bonds so go for it Italy and Spain! Germany can’t protect themselves which is sad and kind of funny. How would you feel if someone lent out all your savings to bankrupt borrowers? Would you ever be so dumb that you’d agree to that? Germany is defenseless. Kind of ironic. Southern Europe pensions paid for by Germans.
“How would you feel if someone lent out all your savings to bankrupt borrowers?”
Like US pensioners, who still labor under the illusion that they supposedly “paid in” to something….. And something other than Mnuchin’s hookers-and-blow fund, to boot….
Only a matter of time until the failed Politicians in Brussels realize that the E.U. as a political and financial Union is DOA !
They will never recognise that and continue onward irrespective.
Question – if ECB intervention becomes limited by law etc, what next?
What are the 2nd and 3rd order impacts in the EU and wider?
Very heavy.
First credit default and yields will soar on debtor countries, markets will tank, and there will be political crisis. Sort of like greece but knowing that there was no Troika to step in – because the rescue mechanism, the funding backstop of ECB debt purchase (whether it was previously overt or not) is not there. They talk of releasing the debt ecb holds back to market etc., but they must know that by itself that means little in comparison to the wider uncertainty, and so it is an institutional/banking or political move, not a market reassurance.
So they would hold an EU summit as there could not be a per country reply at this scale, and either shred each other or come to an agreement on fiscal/budget oversight and mutualisation.
I think people in europe would behave, at least until whatever plan being subscribed to was released. EU does NOT have that much leverage on popular thought or sentiment, and national politics are often very divided, and where not then are seen either as corrupt and not representative by many.
What might happen then is not possible to guess, you are talking many countries where different sentiments are held regarding any of this.
The next logical step is to start printing Deutsche Marks again.
The Germans know this at this point. The QE ruling was movement in political positioning. The ruling class realizes this is the only way. The Germans will start loading up on EU debt before hand though to get at least some of the money back before devaluing the Euro with the Mark and paying back devalued Euros with marks. Looks like the plan at this point.
Imagine if the US politicians gave Canada a bailout to 3 times the size of the American bailout. The Germans are not quite as polarized as Americans. Most Germans understand they are funding the EU. It’s do or die time for the current political class.
Now that Germany has taken advantage of the EU and is big creditor nation and industrial powerhouse, might be a good time for them to do that “conquer Europe” thing again. No floating currency in EU was to German advantage.
Although Germany is a wealthy country, the average Italian is much wealthier than the average German. The Germans know this.
They also know about the immense gold reserves of the Italians at 2450 tonnes (per capita almost twice as much as the US).
They also know Italians are casual about tax evasion.
Or Italian pensions.. almost the most generous in the world.
The Italians have money!! The Italians can reform! They don’t.
The reason the EU is involved is because the Italian threats are existential and commingling of debt advances EU integration. As a German there is -NO WAY- I would want to take any part of Italian debt its clearly just a fleecing.
“The Italians have money!! The Italians can reform! They don’t.”
No democratic country can reform by cutting existing benefits. The people demand more.
My bad, in Germany the left and right united in unity government to restrict choice. So there is that.
And don’t think, UK has only 29% coverage. In Canada, the system is layered. There is a basic pension by Canada pension plan but that only provides for basic survival, some of the time. The other layer is registered pension plans, a tax deferment scheme that kicks in when retired.
There used to be an inviolable rule in the USA that deemed Social Security to be the third rail of politics, touch it and you die. But touch it they have, COLAs that under count real inflation have reduced effective buying power of retirement and disability benefits to poverty levels for most Americans, and at the same time they slashed costs by delaying our eligibility dates. Most of my working life I could look forward to retirement at 65 till they changed that to 66.8 years of age. That means I will collect 21.6 months less SS and pay in that many more months.
Alas as a disabled veteran I have SS disability now as it was denied for decades because the SS Admin refused to accept military and VA medical records as evidence of a disability, that changed in the early 2000’s when a court ruled they are required to accept those records. The result was I qualified for benefits after 30 years of being denied, and got a WHOPPING $980 per month! With COLA’s that is all the way up to the grand sum of $1,086 per month.
They will not need to end SS to destroy it, all they have to do is inflate it into insignificance. But, some politicians who want it dead might be coaxed into supporting it a while longer if we would just turn it over to Wall Street and allow them to use it as a slush fund for the 1%.
I don’t think either, that there will be trillion dollar shortfalls in social security nets. There will print the missing trillions as if their neck was at stake (or head on stake).
It isn’t the Italians that do this though. They are used to low private debt and owning their assets in the south, they have not had the northern welfare tax model until recently, and it is basically corrupting their own order. The politicians are corrupt and people do not rely on them. If they come up with money, people vote for them though now, it is about all most of them are good for. Before euro they could not do this so much. This is making people dependent on eu though, it’s no good, and eu is happy to see its political direction financed.
So the germans they can do what they like and be socialist tax slaves if they like, but in Italy the government tended to print its way out of trouble, and it usually worked. The country works around that system, not the german one.
Also, the gold was signed over to eurosystem from national ownership, because under euro a country is not allowed to hold other currency reserves. There is an argument over this, between some in government, the bank of Italy and ECB .
“but in Italy the government tended to print its way out of trouble, and it usually worked.”
I assume a fairly loose interpretation of “worked…”
Although I do wonder: If government prints and devalues so recklessly and unpredictably, that noone dares lend; the resulting reduced growth in higher order money/credit, may in fact more than make up for increased base money growth. Such that overall broad money inflation ends up lower than in “more responsible, well anchored inflation expectations” countries…….
If that is the case, direct government printing effectively ends up being just a form of taxation. One that even Italians can’t find a way to avoid…..
While overall, effective, inflation is kept in check by lack of growth in broader money.
The government cutting the bankster cartel out of the inflation proceeds, in other words…..
They seemed to have it as a sort of balance of understanding, with occasional default into the bargain. It was not in anyone’s interest to completely ruin the currency. There are cycles I don’t fully understand also, especially international ones, where a faster devaluing currency (read weak) would benefit trade, affect foreign investment/involvement and so on. I expect government banks and business all had an understanding of the framework they were working in, and tacit agreement at least. That was just the way the country was run, the power structure including political understanding by the population, it was their own and it worked as a whole, or at least was closer and more balanced/representative than the flood of finance and different ideas euro has brought.
Anyway, I’m not Italian so I’m not in a position to judge the choice, but the changes that came with euro are not all positive , as is well known.
Like Mish always points out, meaningful measures of inflation in the current era has to include credit. Traditional focus on quantity of Gold above ground, which gave way to looking narrowly at M1 as the be-all-end-all money supply, misses too much. As it assumes all banks’ lending is determined solely by reserves and a fixed reserve ratio, such that the entirety of the demand enabling money supply is determined by those two factors.
Once it is recognized that broader money/credit also matters; it becomes a question as to how much. A hard paper dollar in the hand, will still be a bigger demand driver, than a dollar borrowed, as even in bailoutopia there is some encumberement from at least theoretically at some point having to pay the dollar back. But the case is not nearly as clear cut as a paper dollar being 100% vs a borrowed one 0%.
Which results in: The inflation which now matters, and the one which causes efficiency, hence economywide destructive dislocations, is the one which include credit as well as base money. Hence how healthy an economy is, depends not on minimizing measures of base money inflation, but instead on minimizing measures of inflation which takes credit into account.
Hence, if whatever crazy stunts the Italians performed with the Lira: Even if it resulted in base money growing faster than in other countries, if it simultaneously resulted in credit creation being effectively held back to where it more than compensated for this added base money growth; they just about may have happened on a “system” which, netted out, did a better job than the rest, at minimizing the inflation measures which matter in practice.
Not saying they all wouldn’t be an awful lot better off with a real monetary system without inflation. Just that the current, bankstertopian, alternative; is very possible even worse than what the Italians used to labor under.
(Replying to myself to keep in thread). The Germans don’t want to fund the Italians and have the way out of doing so, and that court case is just smoke in the air with no fire.
Here are the debts re GDP share
german debt 62%
italian debt 138%
italian target 2 as share of gdp 30%
*(italian gdp 1800 bn euro,italian target 2 debt is 500 bn euro)
IF the Germans were to borrow and blitz their way up to equality with Italy on debt, then the ECB will be happily able to buy both Italian and German bonds according to their capital key. And there have been many calls in Germany for infrastructure spending.
Lo and behold, the German coronavirus stimulus!! 750 bn euros of borrowed funds, plus some token debt for the Italians, all yield capped by central bank purchases. So the germans who don’t want the inflationary costs associated with bailing out Italy or the PIGS in general, about face and put these same inflationary costs onto the Eurozone as a whole while being the sole beneficiary.
If you can’t beat them, join them. Is this going to be the final kickstart for inflation? You would think so but the costs won’t fall on Germany because their cv stimulus is the equivalent of cashing out. QED
They want inflation, EU is going into a deflation now. The 750 bn is this?
Or ESM and rescue fund combined?
Or German decision to go much higher into deficit?
Seriously, I lose track of who is spending what, how and where , and also what is planned, authorised, contested etc.
In Germany there was a call before the pandemic to increase spending, whether green projects, or social infrastructure. They rejected that, but with the pandemic have changed tune.
Because of the structure of euro all countries are in the same boat anyway, now Germany will put itself in a position where it can “relate” to the rest. However, the first countries to not adhere to 3% deficit rules were germany and I think france also, that was a long way back though.
How very convenient Germans will be taught to kow-tow to EU laws just when there is a German at the head of the EU?
Almost as if it was supposed to happen that way.
As far as I can tell, Barbie, I mean Uschi, wasn’t that popular in Germany. Hence received a standard treatment for the incompetent, unpopular members of the ruling elites: kicked out to the EU.
While she was minister of defense, scandals of mismanagement and possible corruption followed one another in constant quick succession. I was thinking she would soon get axed, ending her political career, but then out of nowhere she became president of the EU commission. Apparently the French liked here. I have to give it to her that she is the ideal candidate for this position. No factual knowledge or spine, but the perfect target for lobbyism.
The same material as her predecessor.
We were here at the same spot i.e. the supposed disintegration of the Euro 10 years ago, and yet here we are, the Eurozone intact.
Politics will hold it together until the people revolt.
Rome was de facto disintegrated for a long time, before it Disintegrated , as well. Ditto the Papal state. And Pax Brittanica. And The Soviet Union. And the USA…..
So far, all states have been failed states. Nothing new here. Some people just aren’t the sharpest nor most perceptive.
And then to top it all off, there is the “elephant in the room” – the Target2 liabilities. In the Trillions that will never be paid back (at least not in Euros).
“You can fool people sometimes but you can’t fool them all the time”
Apparently you can fool most people all the time. Am observing that time and time again.
Magicians use missdirection, so do Politicians,………..
Forget about Eurozone breakup.
This is only another step towards the endgoal: Political Union
Am flabbergasted that not even “smart” folks can see past the theather.
The ECJ is like a political arm, a tool to help force compliance and integration. It’s not unbiased. It won’t find against the EU in such a case.
If they wanted a something to push reform of EU with it could, but that would also be in favour of furthering the EU project.
So…it is German president of the EU comission telling the German constitutional court that EU/ECJ law/ruling has higher jurisdiction , and that EU law is spoken only in Luxembourg… while the ECB is seated in Frankfurt … what are we to make of that ? I don’t find it intriguing or anything, just something towards stupid or pathetic.
Even greater financial repression of Germans to bail-out others. They are being steered down the path by their own political class and wen they wake up it will be too late.
Meanwhile Macron has planted his woman at the head of the ECB to save France.
Germans will be working for others. Merkel will see to it before she exits stage left.
Germany bailed out non other than Deutsche Bank and Commerz Bank.
This is an attempt at reform that ties together the debt of less thrifty countries, excess deficit, fiscal discipline and budget, at a time when the previous overhang meets up with new spending due to the pandemic, including increased social support into the future, amidst an economic downturn, where target2 differences and hence mutualisation via currency are at maximum, and while the ecb has the whole market propped up. It is how they plan to shift control to Brussels over the whole show. Germany (not the average german mind) has been working hard to build up its presence in EU institutions over the previous years , and germans I guess will get sold out to, or possibly into, the new model. How ? They will see key positions in german hands and EU pushing fiscal discipline on the south, all to correct it towards german understanding. The south is also screwed now, they’ll be given some basic income support to shut up, while what is left of their nations is sold off.
Caradoc, I wonder if Merkel is already too politically damaged to achieve much in the way of reform in this case.
Russell Napier nailed it. The Eurozone nations debt problem that is. Worth a listen. Not just sovereign debt but corporate too.
It would be just desserts to see the German Courts run over roughshod. This is the same court that throws it’s own citizens in jail for thought crimes, including an 87 year old grandmother.
“including an 87 year old grandmother“
Are you referring to the Holocaust denier?
So you think people should be thrown in jail because they have a different opinion on historical facts? If so, then to what other stazi tactics do you subscribe?
“If so, then what other stazi tactics do you subscribe to?”
So you think it’s perfectly acceptable to insult me for asking you a simple question?
In fairness, “the holocaust denier” can be read as a label and not a reference …depends how it is read, and that is in part dependent on the frame the reader approaches with. It’s easily done, but people should maybe think twice before launching accusation . Wonders of the web and a triggered topic.
The entire “denier” meme is meant to illicit an emotional response and shut down the conversation. It’s “beyond the pale” and not to be discussed in polite society. That’s its purpose.
Yes, but I also know people who have no opinion either way who would just use the term without that implied, i.e. to reference the person in question, or even and depending on tone, to place a question over whether the label is apt. Probably not many that do though, and on the web you can’t tell – sometimes/often people just write offhand like they would mean speaking without thinking how it could be interpreted, or that it cannot be. That’s just the web for you, but sure people are free to question the meaning in reply.
Hi Anda, as you say you’re only trying to be fair, but “Holocaust Denier” is not my label, there are countless references to it in media reports. Perhaps to be PC I should have used her name, Ursula Haverbeck, or to be more specific, the lady who “was sentenced for incitement by denying the mass murder of millions of Jews during the Nazi era in Germany”. From that description she does seem to be someone who denies the Holocaust, or shortened a “Holocaust denier”.
This is one of the links.
When I read your original comment I just took it as a factual form of reference. I suppose if holocaust had not occured there could be no deniers, because you cannot deny something that does not exist as it is not known. So to call someone a denier is to assert that something did exist and that the person in question is in error. It’s very subtle, because whether you have believer or denier, there is no question of the holocaust. Let’s turn it around, imagine we are talking of so and so, and someone says “You mean the holocaust believer?” – the implication there is that to believe is exceptional, not widely agreed to, so reducing the idea of the holocaust to fringe theory. So I guess you can see how some are very sensitive to the issue, how it is spoken and what is meant. FWIW I don’t hold a view on the topic, except whatever should not have been done by anyone should not have been done. Simples, and as I said, I took your use of the phrase as casual, and even if it weren’t, I still take it in a casual or from aside manner.
Complex topic that doesn’t seem to ever resolve.
Scoot, I said, “if so”. It’s a qualifier for what follows.
Germany will fall into line as they are so “grateful” to Europe post WW2.
Fekix Zulauf noted Germans were fooled into the Euro – too late now. Was in WirkshaftWoche recently.
Its all BS. If they ran Euro entry requirements now very few of the countries in the Euro currently would qualify to join – I think it was 2 only.
Nothing to see here, Germans sold down the river by its political class. Now on the hook for French, Italian, Spanish……..fill in blanks……..social costs.
EU uber alles.
Wasn’t Goldman Sachs used by countries that really didn’t fit into the admission criteria to cook their books so they looked good enough for entry. If I recall never any blowback to GS for doing that.
Mish, you have company in your prognostications
Thanks for that
Maybe if people in Italy and Spain worked a full day, and not 2/3 of a day, they would have the income to pay for their welfare systems.
If the top 10 or 5 or even 1% of wealthy just consumed and earned as much as average people, how much less labor would we need? What is this fetish about working hard all the time? YOu get one life, you want to spend it doing slavish labor mostly for the benefit of the oligarchy?
Shame on you, don’t you know that facts are racist. The left never lets fact get in the way of formulating their ideology.
It wouldn’t do them any good. If it would, Americans would be able to pay for theirs.
Once you have a central bank, and the more activist said central bank is, working harder just means getting robbed of more. Whatever value you create, gets confiscated by debasement and arbitrary laws; then redistributed to useless, illiterate, regime sycophant, deadweight leeches “making money off their poppeti” regardless.
Germany leaving, and in the process destroying all and any credibility of the Euro, the ECB and the rest of the undifferentiated theft racket known as “The Financial System,” is, far and away, the best thing that can happen for both Germans and Mediterraneans. None of it serves any economic purpose. It is solely there to facilitate crass theft from competent, productive people, by rank idiots on ECB welfare.
“Those facts are very racist.” -American new organization