The Karlsruhe Court has taken into account the position of the Bundesbank, which suffered the birth of the European monetary unification, and has become the very source of inspiration for every Euroscepticism.
The German Constitutional Court, with months of delay, decided to refer to the European Court of Justice decision about the OMT (Outright monetary transactions), announced by Mario Draghi in the summer of 2012, with the now famous phrase "whatever it takes", and approved by the ECB shortly after. This is a change from the attitude of the red gowns of Karlsruhe, since the Court in previous time had formulated a doctrine according which it could decide on any European law if German interests were jeopardized.
Not that the majority of the judges had not a clear opinion on OMT. They share the point of view of the Bundesbank, that is an adverse opinion on the instrument developed by the ECB. In summary, the OMT should be considered a violation of EU rules concerning the financing of public deficits, resulting in possible monetization of sovereign debt (and thus inflation).
However, the Court also considered excessive to issue a direct condemnation of an instrument that has never been used, has not given a single penny of loss for any country, including Germany, but that with the very existence has brought down conspicuously spreads in every country. The reference to the Court of Justice is accompanied by a set of conditions that the German Court suggests to their colleagues in Strasbourg.
The wishes are essentially the following:
i) that the OMTs are not decided by governments as part of the rescue packages coordinated by the ESM (the European stability mechanism fund "save states", established in 2011);
ii) that the ECB has a status of senior creditor, that is excluded from the creditors that may suffer a loss in the event of restructuring (so as not to incur losses to the taxpayer through the German share in ESM) in the capital of the ECB);
iii) purchases of securities in the transactions OMT not unlimited;
iv) that the ECB does not interfere with the formation of market prices, that is, that it does not place a cap on the level of interest rates.
These are not easy wishes. The most insidious is to put a limit on purchases that can be made with the OMT. Previously, the ECB, under the chairmanship of Jean-Claude Trichet and also under that of Draghi, had made purchases of government bonds of countries under speculative attack, but in a limited and almost hidden way. The novelty of the OMT is that if a government is in an emergency situation (typically because of a speculative attack) and asks for a loan from ESM, accepting the conditions imposed by European Commission and Governments, the ECB may intervene with purchases without limits.
Obviously without limits does not mean an endless buying of governmental bonds. The red gowns of Karlsruhe (or their inspirers of the Bundesbank) should ask to some mathematician on the difference between unlimited and infinite. The sphere is a typical example of geometrical entity unlimited but not infinite. Given that the purchase of securities of OMT are those with a maximum duration of three years, it is clear that we are not talking of the whole public debt of, say, Italy, but only a part. But beyond this consideration, the fundamental point is that the nuclear weapon that puts an end to speculative attacks is the fact that any operator knows he cannot beat a central bank playing with the money that the bank issues. Consequently speculative attacks fall, and in fact this is exactly what happened in the second half of 2012, so that the spreads have declined.
This does not mean that the spreads have disappeared. But it does mean that it is not true that depends on a lack of fiscal discipline of the Pigs (the Bundesbank idea), a part from the Greek case in the years before the financial crisis of 2008. If the spread would depend only on the irresponsibility of Mediterranean cicadas, how to explain the furious swings that occurred from 2010 onwards? It must be said that the request for a limit is not surprising; in September 2012 the Karlsruhe Court approved the ESM, but placing a limit in regard to the German contribution of 190 billion, the German share. No further increase is allowed, and it is the right of the same Court to control. And in fact the Court has announced that March 18 will examine the status of ESM and Fiscal Compact .
The OMT battle is not settled, and we have to wait for the Court in Strasbourg, during the current period of the Greek Presidency of the Union, or the following of Italy, to take a position on the requests of colleagues in Karlsruhe. The immediate reaction of the financial markets has been positive, and the spreads have fallen. But it can not be excluded some possible backlash; the point is that the number of those who would like an exit of the Pigs countries from euro (or that of Germany), and which consider Angela Merkel a dove, is broader than can be deduced from 4.9% of votes obtained by the euro-sceptic party in the recent elections.
It is well known that the Bundesbank, which had dominated monetary policy in Europe for over twenty years, has suffered the birth of the European monetary unification. Now it has become the source of inspiration for every Euro-scepticism; the argument of better grip on German public opinion is the fear of transfer-union, with the German economy which funds the government budgets and trade deficits of southern countries.
The second item is the concern for inflation, according to the deep-rooted idea: issue of money = higher prices. But this is not enough; the ECB's monetary policy is under fire also because it determines interest rates too low (in Germany), and thus causes losses to the German savers.
For the third time, with intervals of two years, the Greek debt (now totally in the hands of the EU) asks for a loan, or some further consolidation. At the Treasury ministers of euro countries the issue is already under scrutiny: surely it will become a new battleground for the German euro-sceptics.