Three cheers for the, er, Verfassungsgericht!

Yes, I know, even more incomprehensibility from me but surely y'all know that the Verfassungsgericht is the top Court in Germany!  Well, I did, er, five minutes ago when I read the report in The Telegraph!  Anyway, bless its little German socks, it has just stuck two very grosse fingers up at the European Central Bank and the European Court for breaching EU rules in trying, in effect, to print monopoly money to keep Italy afloat.

In an explosive judgement, the German constitutional court ruled that the ECB had exceeded its legal mandate and “manifestly” breached the principle of proportionality with mass bond purchases, now topping €2.2 trillion and set to rise dramatically. The bank had strayed from the monetary realm into broad economic policy-making.

The court said the German Bundesbank may continue to buy bonds during a three-month transition but must then desist from any further role in the “implementation and execution” of the offending measures, until the ECB can justify its actions and meet the court’s objections. It also said the Bundesbank must clarify how it is going to sell the bonds it already owns. 

In essence, this is not so much a monetary challenge to the EU as a political one which boils down to the question - qui regat? - who rules?  What's the German for 'interesting times'?

 

 

 

Comments

[Whitewall]

Print enough money to keep Italy afloat? Again? You're gonna need a bigger bank boys.

[Loz]

Was waiting for the Gaffer to fall for Ambrose "Cry Wolf" Evans-Pritchard's latest primal scream.

The markets didn't blink.

Why?

Because the EU only has to explain itself, not do anything. The EU has got 3 months to come up with a fudge explanation for the debt financing which it will duly do and shove up the Verfassungsgericht's arse and all's well that ends well.

The Jerries will let the PIGS (minus the I for Ireland because Ireland listened to the Jerry / EU demands for reform, shook off the finance crisis and are now one of the richest lowest tax countries in Europe) suffer while hoovering up all the defunct businesses, drip feeding debt financing to keep the patients alive.

Only when the PIGS "do an Ireland" will they be released from their self-imposed penury and rejoin the real world, the world devoid of magic money trees - which is exactly what would happen to them if they split from the Euro and let the market play on them. More so, actually, the markets would Argentina-ize the PIGS in one fell swoop and make Mutti and the euros look like a bunch of light-touch pansies.

Spain and Portugal have done a "partial Ireland" over the last decade at times, seeming to get austerity done and then blowing it. Greece and Italy have been the childish foot-draggers, "Oooh, do I have to".

Yes you do, you spoilt brats, or else bugger off and let the market sort you out good 'n' proper.

SoD

[Loz]

https://www.theguardian.com/business/2020/may/05/jolt-to-eurozone-as-german-court-warns-against-central-bank-stimulus

The benchmark 10-year bond yields in the euro area were between two and nine basis points (bps) higher on the day. Germany’s 10-year Bund yield was up 2.5 bps at -0.54%, while the Italian 10-year debt yield was 7 bps higher on the day at 1.82%.

The court ruling initially rattled European stocks markets and briefly erased gains driven earlier in the morning by hopes global lockdowns would ease. However, shares later recovered: the FTSE 100 was up 1.7%, Germany’s Dax rose 2.5% and France’s CAC rose 2.4%.

Some analysts said that the three-month deadline was reassuring and lifted sentiment after the initial panic. Kenneth Broux, a strategist for Société Générale, said: “The PSPP violates German law but I think the three-month deadline is important to clarify proportionality and the ECB can move on after that.

What's the German for "storm-trooper in a teacup"?

SoD

[Whitewall]

SoD,
I'm at a disadvantage here as the article is behind the paywall so maybe my comment would be answered within. But. ..."and rejoin the real world, the world devoid of magic money trees - which is exactly what would happen to them if they split from the Euro and let the market play on them." The Euro is not a magic money tree in and of itself? What thing(s) of value is the Euro based on that keeps it out of the "funny money" category?

[Loz]

Answer: Germany and the northern European states.

The markets know they're worth a lot and that underwrites the Euro as a whole and the PIGS in particular. That's the magic money tree the PIGS wish to plunder. Blighty had the Marshal Plan and North Seas gas and oil 1945-75, same sort of thing. Blighty had more free rein with its magic money trees, and the PIGS seek that free rein with the assets of the Euro creditor states.

If you wanted to instantly start a terminal crisis for the Euro you'd instigate debt sharing with no obligations on the PIGS. The markets would know immediately that the PIGS would harvest the magic money trees of Germany and the North bare in a few years if not months now given C19. It truly would be all over for the Euro quite quickly.

While Germany and the North still has the leverage to drip feed only the minimum debt financing and keep beating the PIGS with the austerity stick, the markets'll be happy enough.

Take the adults away and let the children run the roost and the markets will Argentina-ize the flippin' lot, Germany and the North included.

The one to watch is Blighty. How long will the markets sustain UK debt with the entire system broken by design and practically filled left, right, and centre with morons? Might be worth a medium to long-term short.

SoD

[Pat]

This is essentially the same old political battle.
France,Italy,Spain etc. want the EU to be funded by Germany and to a lesser extent Holand. Germany and Holland are less keen on the idea.
We will see whether Germany relents and agrees to pay for everything, or whether the southern states give up on German imposed rules.
Of course the dispute as to how many of those migrants Merkel invited in should be resetled outside Germany, and indeed how to do that if Schengen is reintroduced, is still rumbling

[Whitewall]

"Answer: Germany and the northern European states".
So what underpins the Euro is more concept than commodity? As long as a handful of States are doing well, the currency markets accept that as the "store of value". When a hostile predatory economy moves in to destabilize this handful of Northern States the Euro goes into a stall.

[Bob]

Testing

[Loz]

What underpins the Euro directly is what's on the ECB's balance sheet to underwrite all the Euro money in circulation. Some good stuff but increasingly more PIGS junk bonds.

What stops the markets panicking about the junky dilution of the asset side of the ECB's balance sheet (and hence panicking about the Euro) is that the junky PIGS debt is informally backed by the creditor states: Germany and the North.

The belief that the creditor states would always use one means or another to buy PIGS debt to prevent PIGS bond rates from sky-rocketing, bankrupting the PIGS, and destroying the Euro assets on the ECB balance sheet and thereby destroying the Euro. That's what holds the whole thing together.

It's no different to Blighty and the US's currencies in that it's still fiat money. On Brit notes it has a picture of Her Maj saying, "I promise to pay the bearer on demand the sum of X pounds" where X is the value of the note. What that means is X pounds worth of whatever is on the Bank of England's balance sheet.

What that really means is if, say, 1 trillion pounds of sterling is in circulation (the debts, IOU's, all the "I promise to pay the bearer on demand the sum of X pounds") and it all goes tits up and you present a fiver to Her Maj you'll get 5x 1 trillionths of whatever the BOE has got on its balance sheet.

So if you had 5 Euros and all the junk bonds on the ECB balance sheet suddenly became worthless because the PIGS went bankrupt, then your 5x 1 trillionths of the ECB's balance sheet would be 5 x 1 trillionths of something much smaller than was the case before the PIGS went bust and their debt became worthless.

If the markets thought that was the going to happen then the Euro would collapse. No-one would want to own an IOU where most of the collateral underwriting it had disappeared. Or more accurately, one Euro would devalue to 1 trillionth of whatever remained worth something on the ECB's now much smaller balance sheet.

That's how I think of it.

SoD

[Whitewall]

SoD, I see your point. When I wrote "a hostile predatory economy" moves in (China), it can offer to buy some or all of the debt of the PIGS thereby "owning" them and easier access to Northern Europe. Europe is now at the point where it must choose: China or the US.
https://www.gatestoneinstitute.org/15994/coronavirus-europe-china

[Loz]

On the right track, Whiters.

But the Jerries and the rest of the North might be in good enough shape to lock out both the US and China and hoover up all the cheap bankrupt businesses in the South and apply some good ol' Teutonic "System, system, system" to them that they haven't been applying to themselves.

In other words, Europe has another choice. To let Germany step up to the plate by invitation rather than gatecrashing which has been the prior experience and let her operate all of Europe? Keep the US and China out.

Blighty being in absentia through Brexit is mighty convenient. I've been saying for a long time it was never in Blighty's interests to leave Europe to a hegemony that it wasn't a top table player in - so has every strategist since the Romans departed Blight in 400AD.

But apart from one hand-bagging Blighty's post-war political class has failed in every endeavour in the Brussels gladiatorial arena. I'm not sure Blighty's pols have the skill to take any advantages from the opportunities presenting in Europe, just as they are useless at the damage limitation required for C19. And Blighty's lackey peeps are as dumb as bricks too, choosing to leave a better, in fact the only, decent governance on offer for the worst. Further corroboration of the "A people gets the government it deserves" adage. So the Jerries have no threat from our direction.

I guess it's just a free-for-all from the half decent players left standing: Germany, the US, and China, for what remains in the rubble of southern Europe.

The dream of the West, India, and the Tigers putting up a new Cold War wall against China and finishing the job on socialism is just that, a dream. Our only hope is that China over-extends in pigging-out on all the opportunities in every continent on the planet, and local forces - like Germany in Europe as per the above - add up to enough to check the Chinese empire sooner rather than later. Plus India is an unknown quantity that could come to the fore in all this and pose a threat to China's ambitions. For its size it should be doing much better.

SoD

[Whitewall]

I like the point about India. It should be much more developed than it currently is. The West can't leave so much of its supply chain in China and India is there waiting, along with a few others.

China has tipped its hand with this commie virus attack and done so a decade or two ahead of their plans. The virus is now "bomb one". I think number two will have to come sooner than they planned. But it will come somewhere and fairly soon.

[Loz]

Jeez, another day anther epic failure for the HMG, NHS, PHE, SAGE nexus ...

https://www.telegraph.co.uk/news/2020/05/06/exclusive-gowns-delayed-ppe-shipment-turkey-impounded-failing/

For those outside the paywall, this saga has been dragging on for weeks. The NHS announced a major acquisition of PPE gowns from Turkey, 400,000 of them. But the flights were delayed because the NHS procurement team didn't check that the Turkish supplier had no export licence. A row unused while the plane waited on the tarmac.

Now it turns out the PPE gowns are all defective. Unbeleivable.

The clue as to the negligence is here ...

Last week, the NHS banned trusts from sourcing their own PPE because they were seen to be competing for the same vital gear. But procurement chiefs have complained that they have since been sent Chinese-made masks from the national stockpile that do not effectively repel fluid.

"We have FFP2 and FFP3 [masks] quarantined as not fit for use," Jacqueline Scroggs, the head of clinical products at University Hospital Birmingham NHS Foundation Trust, said. "I really worry that not all trusts will pick these up and they will end up in use. Who is checking and ordering these? It's not rocket science."

Clare Nash, a clinical procurement chief at University Hospitals of North Midlands NHS Trust, added: "Who is checking the specs before these products get shipped? It's so obvious they don't meet the specs just by looking at them."

Paul Ralston, the head of procurement at Rotherham NHS Foundation Trust, said he had received three calls about sub-standard deliveries from the national stockpile. He added: "This has to be sorted – we could be putting staff at risk if this continues."

Once again, Bob, centralisation. A self-imposed monopoly. In this case the NHS refusing to devolve procurement and allow competition.

I don't know how many times it will take for the penny to drop. But just look at the list now: total failure across the board of the HMG, NHS, PHE and SAGE across the list of things that mattered ...

1. Testing
2. Track and trace
3. Lockdown
4. PPE
5. ICUs / ventilators
6. Public masks
7. Borders
8. Care homes
9. Leveraging EU purchasing
10. Leveraging private sector and academics

As the Eurovision song contest goes for Blighty's performance with monotonous regularity: Nooooooool pwun!

SoD

[Bob]

If the 20th century proved anything, it's that centralization of production doesn't work. That includes purchasing.

There's a lot of movement regarding supply chains. Large American companies like Apple and the auto manufacturers have already developed 2nd and 3rd sources for critical parts and processes because of the current trade war with China. C19 will probably accelerate the trend. Mexico will probably be one of the biggest winners, since transportation and other costs between us and them are lower.

There's pressure in the EU to repatriate manufacturing. Germany has long relied on a manufacturing policy for economic stability and has a lot of influence.

[Whitewall]

GLEICHSCHALTUNG? From a Reuters piece:
EU envoy says removal of phrase in op-ed in China newspaper ‘regrettable.’

The European Union ambassador to China said on Thursday it was “regrettable” that part of an opinion piece co-authored by 27 European ambassadors and published in the official China Daily had been removed before publication.

A comparison between the original op-ed uploaded onto the EU embassy website and the one published on Tuesday by the China Daily showed that in a sentence beginning, “But the outbreak of the coronavirus”, the words that followed – “in China, and its subsequent spread to the rest of the world over the past three months” – were removed.

“It is regrettable that part of the sentence about the spread of the virus has been edited,” EU Ambassador to China Nicolas Chapuis told reporters at a briefing".