Germany's judges hold the euro's fate in their hands ..

Thursday, July 07, 2011

Germany's judges hold the euro's fate in their hands ... Whether or not Europe's monetary union survives in its current form, shrinks to a Carolingian core, or shatters, depends as much on abstruse legal arguments put forward on Tuesday in Germany's constitutional court as it does on the parallel drama unfolding on Greek streets. Germany has warned that Greek bankruptcy would have set off epic contagion. If the eight judges in Karlsruhe rule that Europe's €500bn bail-out machinery breaches of Germany's Basic Law – or Grundgesetz – in any significant way, they risk knocking away the central prop beneath the debt edifice of Southern Europe. – UK Telegraph

Dominant Social Theme: As these bailouts are working, German justice is irrelevant.

Free-Market Analysis: The Telegraph's Ambrose Evans-Pritchard has returned to the fold after a long absence to remind us that the real action regarding a united Europe lies not in Brussels but in Germany. In an article entitled "Germany's judges hold the euro's fate in their hands" (see above excerpt), he reports on hearings just held in Germany on the constitutionality of the ongoing "bailouts" now taking place in Greece, Portugal, Ireland, etc.

The bailouts, in fact, are not constitutional by any measure, though the German judges charged with hearing the case will likely downplay in their final verdict the full impact of the unconstitutionality of what is now occurring. But Evans-Pritchard seems to believe they'll set strict parameters going forward as regards the further propping-up of Europe's Southern PIGS. Since the PIGS sovereign debt crisis is an ongoing one, the decisions the German judges reach in September (when the verdict is to be delivered) will have significance.

According to Evans-Pritchard, issues before the judges as regards the Greek, Irish and Portuguese bailouts include the complaints that the loans subvert the Bundestag, violate the "no bail-out" clause of the Lisbon Treaty and amount to fiscal transfer by stealth.

Such a transfer of funds without changes in fundamental German law regarding the EU is simply and clearly unconstitutional. This is not an academic point. The Germans generally were loath to lose their Deutschmark and in order to gain acceptance, very specific language accompanied the move to the euro.

European leaders are putting the best face on all this that they can. There are at least three points of view about what is going on. The first is that top Eurocrats are determined to hold the union together. The second is that they are merely extending the inevitable dissolution until their various banks can dig their way out from under the PIGS debt.

The third possibility would be that the concern is a ruse and the dissolution of the EU is actively sought because it will provide an excuse to implement a genuine world currency. A collapse in China, which in our view is certainly a possibility, would add to the chaos. It is certainly possible such a collapse could be initiated via the upcoming German court case. Here's some more from the article:

The judges know the risks. They will bend a long way to find a formula that does not set off a banking collapse, or threaten Germany's strategic investment in post-war Europe. But will they bend enough to satisfy the bond markets when they issue their verdict, probably in September? Andreas Vosskuhle, the court's president, noted acidly that the hearings were not about the "future of Europe or the handling of the debt crisis". They are a matter of law.

Greece cannot borrow its way out of this debt crisis. This is the same court that stunned EU elites with its volcanic ruling on the Lisbon Treaty in June 2009, cautioning Brussels that the EU is a club of sovereign states, not a state itself; that national parliaments are the only legitimate fora of democracy; and that certain fields "must forever remain under German control" – including budgets.

According to Evans-Pritchard, the court is not merely dealing with the problems of the present day as regarding the euro. It is mindful of history as well and is "über-vigilant because it knows where pliant judges went wrong in the 1930s." Pierre Lellouche, France's Europe minister, claimed that last year's deal with Greece was a "constitutional coup." He may have spoken too soon.

Up to perhaps 70 percent of Germans now doubt the long-term viability of the euro according to polls. In Greece some 80 percent are opposed to taking money either from the EU or IMF. In any event, loans are not going to save Greece as it is likely mathematically impossible for the Greek government to pay down its debt by taking on more debt. "Greece's public debt will rise to 161pc of GDP by next year, up from 120pc when the crisis erupted," Evans-Pritchard points out. Greece is headed in the wrong direction and its economy continues to erode as well.

So what's the solution? Perhaps a kind of Marshall Plan for Europe's PIGS. It might include zero-percentage loans or outright subsidies and a frank default as well. Of course such a solution presupposes that the German populace is amenable to an emergency plan benefiting Europe's PIGS. There is, unfortunately for the EU, no reason to think so.

At the moment, EU authorities simply seem to want to elongate the crisis in the hopes that banks will find ways to offload Southern European debt or that the economy picks up. This has led to the spectacle of one failed solution after another.

According to Jean-Claude Juncker (see yesterday's article), Greek sovereignty will be "massively limited" and Germany will basically oversee a massive sale of the Greek national portfolio.

This will not sit well with the Greeks. Anger is the predominant emotion in Athens currently. "Greece blasts ratings agency 'madness' as Portugal downgraded to 'junk'," reads another Telegraph article. Foreign minister Stavros Lambridinis is angry about the 'madness' of ratings agencies, saying their moves currently had "the wonderful madness of self-fulfilling prophecy."

What Lambridinis meant was that rating agency downgrades only made it more difficult for countries like Portugal and Greece to raise the capital needed to pay down sovereign debt. (It is interesting that European politicians are making this point, as millions of European and American consumers have often voiced similar sentiments as regards their personal finances.)

Moody's Investor Services, one of the agencies involved, made the ironic point that Portugal's long-term prospects had been damaged by the international efforts to rescue Greece. The Royal Bank of Scotland and Barclays were banks most affected by the ratings changes, as these two banks had high exposure to Portugal's sovereign debt.

Moody's evaluators now claim Portugal will need a second bail-out before its bankers can raise money in the capital markets. Based on the conditions imposed on Greece, it was likely that "private sector participation would be required as a precondition" to a second cash injection, said Moody's.

French banks, pressured by French President Nicolas Sarkozy, recently offered to roll over 70pc of debt maturing by the end of 2014. This deal would seem more unlikely now given that ratings agencies have made it clear such a "voluntary" rollover would likely still be considered a default.

Nearly a year into the sovereign debt crisis, the solutions seem as murky as ever. Growth might cure many of the problems afflicting the Southern PIGS but the kind of economic growth that is needed is not likely to occur. It's hard to see how the EU survives in its current condition.

Conclusion: The dominant social theme of the EU as an inevitable force in the lives of Europeans is under sustained attack. The Germans, whose support is vital to the EU's continuation, may deal it a terminal blow when the court rules on the constitutionality of the bailouts now implemented or being planned. An implacable force may soon meet an immovable object. If the EU situation does not resolve itself before then (one way or another) stay tuned for September.