The proposed rescue fund for Europe not only breaches German law and EU treaties but could condemn a generation
– Germans could be consigned to serfdom to save the euro (Guardian, Sep 9, 2012):
Some commentators have taken to referring to this Wednesday as “the day that could make or break the common currency”, and they’re not far off the mark. On that day, Germany’s constitutional court will announce its verdict on the legality of the European Stability Mechanism, the permanent rescue fund for struggling eurozone countries. If implemented, the ESM’s share capital of €700bn would be provided by all 17 eurozone members in proportion to their economic size. Fourteen have so far ratified the treaty – Estonia, Italy and Germany are the only ones remaining.The German government has defended the ESM treaty, claiming it would fix Germany’s maximum liability at €190bn, and that the Bundestag would retain control over the grant of further assistance. Either German politicians have not read the treaty they have signed, or they do not understand its small print, for there is little in the document that supports their interpretation. Because the ESM is plainly unlawful.
For example, article 25(2) of the treaty states that members are jointly liable for any losses arising from loans made by the ESM. That means if one or more of the ESM members fail to meet their agreed financial contributions, the other members are liable for the shortfall. That situation is already a reality, because Greece and Portugal are unable to make any contribution.
Article 21 further authorises the ESM to borrow on the capital markets, from banks or from other financial institutions, which presumably includes the European Central Bank. There is no overall borrowing limit. The ESM effectively provides for the possibility of monetary state financing through the ECB. ESM members are again jointly and severally liable for all losses that may be incurred on money borrowed by the ESM to lend more money that cannot be repaid. Worse, those receiving the money are at the same time liable for any losses from bad debts – they are lending the money to themselves. If they are insolvent, their share of the loss will have to be borne by those still able to pay. Payer countries thus pay twice – for their share of the loss, and that share of the loss the defaulting country lent to itself.
Contrary to the position of the German government, the ESM does not contain any limit on the extent of any member state’s overall liability. If the ESM governors issue shares in excess of their nominal value, issue bonds or borrow from the ECB, and only one or two states become insolvent or leave the eurozone, Germany’s exposure under the ESM could easily rise to between €400bn and €500bn. If the crisis worsens, Germany’s likely ESM losses could exceed €700bn. That would push up its public debt to 110% of GDP and beyond.
Germany’s federal budget has a size of slightly over €300bn per annum. The ESM would, on realistic assumptions, increase Germany’s exposure to losses in the weaker eurozone economies by between one and a half and twice the size of the federal budget. If Germany’s other potential liabilities as an ECB shareholder and its additional aid to Greece, Ireland and Spain are taken into account, total exposure could reach a sum equivalent to four or five times the size of the federal budget.
Even if only part of Germany’s total claims against other eurozone governments eventually have to be written off, the loss would run into hundreds of billions and effectively extinguish the Bundestag’s financial room for manoeuvre – its budgetary autonomy – for a generation and beyond.
The ESM is not only patently in breach of the German constitution, it also violates every relevant provision of the EU treaties. Article 123 of the Treaty on the Functioning of the European Union (TFEU) – which replaced the EC treaty – forbids the use of the printing press to bankroll governments and public authorities, makes it unlawful for them to borrow from the ECB or the national central banks, and expressly prohibits the sale of government bonds to the ECB.
The ESM would create a parallel “bad bank”, which would be allowed to do everything the ECB is ostensibly prevented from doing under the treaties: to buy government bonds directly, to lend to national government, to grant such loans without any prescribed limit, and to rescue insolvent banks. Once the ESM runs out of money, it can borrow directly from the ECB – which will print the funds needed.
Moreover, the ECB president, Mario Draghi, has already indicated that he would take bond buys by the ESM as a green light that the ECB is no longer bound by the restrictions of article 123. At present the ECB has about €220bn in sub-standard Greek and other southern European government bonds on its balance sheet, in addition to much a higher sum of “shaky” government debt instruments deposited by banks as “securities” for ECB loans. Draghi refuses to disclose the breakdown of government debt on the ECB’s books or their credit rating. The ESM treaty effectively provides for the mutualisation of national debt within the EU with no upper limit. Save for eurobonds, there could be no more flagrant violation of the “no bail” clause of article 125.
Unless wages can be depressed further, inflation will eventually rise significantly due to the combined effect of an increase in the money supply and a depreciation of the euro, with resulting increases in import prices – especially of oil and gas. That trend will accelerate every time the ECB fires its so-called “big bazooka”. Draghi has waited for the opportune moment, and is inaugurating the “lirafication” of the euro, the redefinition of the eurozone along Italian lines. Nothing could be more antithetical to the original “Bundesbank” model for the ECB and Article 127 TFEU, which says price stability and maintenance of the euro’s purchasing power are the ECB’s primary objectives.
Yet, despite the ESM breaching German law and EU treaties, few observers expect Germany’s constitutional court to say so, although many think it may ask for minor changes.
If implemented, the ESM will reverse the greatest 19th-century political achievement in Europe: the transfer of the power to determine taxation and expenditure from unaccountable monarchical governments to formally accountable parliaments. The eurocratic transformation will have taken place through systematic disregard by the EU institutions and its member states of practically all legal and constitutional safeguards put in place to prevent precisely the disaster that has befallen the eurozone now.
In the 18th century, the Landgrave of Hesse sold thousands of men into military service for the British crown. Today Germany’s political establishment seems committed to consigning German taxpayers to economic serfdom and stagflation for at least a generation – not for gold, to be fair, but for the euro, to assuage the markets and to appease international opinion. The issue is: will the German constitutional court take itself and the German voter seriously? Law, one had better remind oneself, is the continuation of politics by other means.