The markets have celebrated Mario Draghi's announcement that the European Central Bank will embark on unlimited purchases of sovereign bonds from crisis stricken countries. But are such purchases really legal? Draghi's own justification for the program leaves plenty of room for doubt.Concerns? What Concerns?
European Central Bank President Mario Draghi is spending a lot of time on the road these days, not unlike a traveling salesman. The product he has on offer is credibility, but in Germany at least, it is proving difficult to find eager takers.
Last week, for example, Draghi gave a speech to several hundred business leaders at the Berlin Congress Center -- and the mood was reserved. German business owners still have fond memories of the old deutsche mark, and Germany's central bank, the Bundesbank, still has a good reputation. Draghi's recently announced plans to launch unlimited purchases of sovereign bonds from crisis-stricken euro-zone member states, on the other hand, are being met with disconcertment and concern.
"These new steps are not a departure from our mandate," Draghi told German industrial leaders. The ECB, in other words, isn't just focused on price stability, but is also engaged in "ensuring the proper transmission of monetary policy." Beyond that, though, concerns are unfounded. The moves made by the ECB, Draghi insisted, "do not aim to finance governments, and nor would they if they were activated."
Draghi, of course, was not as concerned about those gathered in the room before him as he was about a man sitting 425 kilometers (266 miles) away in Frankfurt: Bundesbank President Jens Weidmann. Weidmann believes that, with its bond purchases, the ECB will help euro-zone governments gain access to funds at attractive rates by pushing down interest rates on those bonds. But that, in Weidmann's view, is fiscal policy rather than monetary policy and is thus outside the ECB mandate.
Concerns are in the eye of the beholder. Moreover, I have no doubt that German chancellor Angela Merkel knows full well that not only is the ECB's program in violation of ECB mandates, it is also against the German constitution.
Even ardent supporters of the Euro at Eurointelligence have admitted as much.
...The legal argument is quite strong in our view. The entire euro rescue effort is legally tenuous, and hard to square with what we already know about the German constitutional court’s interpretation of the Treaties, and its views on the scope and limits of financial crisis management. We know out of experience that it is always wrong to second-guess this fiercely independent court. The only thing we do know, in contrast to many financial market participants, is that the court will not take into account the financial market reaction of its decision.
Had Merkel made objections against the OMT, the court would likely have struck it down. However, Merkel does not want the disintegration of the euro on her watch and that is all that matters.
There was no vote by German citizens. And as expected, the German constitutional court bowed to her majesty Angela Merkel. She was willing to sell her soul for her political beliefs and to preserve her legacy. Merkel sold her soul alright, its her legacy that is in question.
German Central Bank Concerns Irrelevant as Well
Concerns by the German central bank do not matter either. The same thing happened with Fed actions in 2008 and 2009.
I wrote about this well in advance (on April 03, 2008 to be precise), and it is one of my personal favorite posts. I have referred to it often enough but in case you missed it, please consider the Fed Uncertainty Principle, specifically corollary number four.
Uncertainty Principle Corollary Number Four:
The Fed [ECB] simply does not care whether its actions are illegal or not. The Fed [ECB] is operating under the principle that it's easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
Politicians in high power as well as central banks do not give a damn about concerns, nor do they care about obvious illegalities. They do what they want because they consider themselves to be above the law.
Concerns about legalities are for peons, not the royal court. In the end, it does not matter what the concerns are, or even what the popular vote total is. All that matters is who gets to vote, and more importantly, who gets to count the votes.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com/
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