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Waiting for the Second European Shoe to Hit the Floor!

Posted on the 12 June 2013 by Davidduff

Is he cleverer than a really clever thing, that Mario Draghi, chairman of the European Central Bank (ECB), or is he just too clever by half?  Alas, we shall not find out until after September when the German Constitutional Court, delaying its decision until after the German election, decides whether or not Draghi's "cunning plan" to buy up government bonds in "unlimited quantities" (his words!) from any euro-member state is legal - under German law.  Thus, this week we have the extraordinary spectacle of a European institution, in effect, standing 'trial' in a German court.  They do so, of course, because if Draghi's 'Ponzi scheme' goes broke it will be German tax-payers who will have to pick up the tab.

It might be said that Draghi has earned his title as "a really clever thing" because his plan of action taken to save the euro has worked - without him actually doing a single thing!  He simply issued a press statement last year promising to do whatever it takes and the markets instantly subsided  but to date there are no hard and fast details of his policy, but as Spiegel points out, this is deliberate:

Monetary policy and legal objectives tend to clash, as witnessed by the judges' attempt to find out from the central bankers exactly what lies behind Draghi's nebulous announcement to buy unlimited quantities of sovereign bonds -- and a lack of information about when the purchasing is slated to begin. The ECB is treating the decision as a classified matter. "Until now, we have had to make do with a press release," complains someone closely involved with the case.

This air of secrecy is maintained on purpose: Monetary policy relies on psychology, and precision is generally damaging.

Bluffing, as every poker player will tell you, only lasts for so long.  This court action could be the beginning of a real test of the ECB's will and power.  Of course, the German court cannot rule on the behavior of a Eurpean institution as such but it can force its government not to support policies considered inimical to German tax-payers, as the WSJ points out:

The Karlsruhe
court has ruled in favor of all crisis-fighting measures to date. The ECB
doesn't fall within the court's jurisdiction, so it can't technically halt OMT
even if the program is deemed unconstitutional. A ruling isn't likely before

Yet the German
court will be considering important questions about the commitments of
taxpayers across the euro zone. For now, those commitments remain as
theoretical as OMT itself, and so the justices may well conclude that they
can't rule on a hypothetical.

But if the ECB
does have to go all in for Spain or Italy, it could be too late by then for the
court to rule on the constitutionality of German involvement. If it ducks the
issue now, Mr. Draghi will be pleased, but German taxpayers may pay the price down the road.

It is necessary to constantly remind oneself that since the recent alarums and excursions within the euro zone - nothing has changed - nothing has been really solved - there is still no, er, 'final solution!

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