Wednesday, 12 June 2013

Washing the ECB dirty linen in a German court

BUBA yearning for its return?
Unless you are a monetary economist like yours truly, or at least unless you take active interest in the risks faced by the Euro monetary union in these turbulent times when five Euro area countries have had to be bailed out by the rest, you would probably think that what happens in Germany's Constitutional Court in Karlsruhe is irrelevant to you.

That would be a gravely wrong assumption.   The German Court is being asked to decide whether the ECB's decison to launch its OMT (Outright Monetary Transactions) programme was ultra-vires the ECB and breaches German law.

Those making the argument against the ECB are some extreme German exponents, politicians and economists, who view the European Union as a project to Germanise it.    But unbelievably the objectors include the German Central Bank - Deutsche Bundesbank  (BUBA)  - that is an integral part of the system of European Central Banks.

This is a typical case of washing the ECB's dirty linen in public, in full view of the financial world that is closely following the proceedings in Karlsruhe, knowing that if the Court were to decide that there is case for believing that the ECB has not acted within its terms of reference, it would practically cause great instability on financial markets, forcing countries in distress to be shut out of the financial markets and basically risking a total blow-up of the Euro Monetary System.

Why would BUBA take such a  drastic course of action when all Euro area governments, including the German government, have applauded the ECB for launching the OMT and have confirmed that according to them the ECB is acting within the confines of its statutory powers?

BUBA has a tendency to have a very narrow view of the world.   They view things from a strictly German perspective and have not taken on the board a European vocation. They continue to view the Euro as a strictly economic project rather than a political project as the rest of the world sees it.  They were against the Euro project from inception and have always insisted that the monetary union should be the end result of a fiscal and political union not a precursor or catalyst to it.  The Euro exists because the politicians over-ruled them.   But BUBA loses no opportunity to put spokes in the wheel even if in so doing it could jeopardise the Euro's own existence.

The fate of the Euro should not be decided by a German Court instigated by an unelected Central Bank.   It should be decided if anything by the German people who need to answer whether they are prepared to force their Central Bank to feel committed to decisions taken with collegiality by the ECB or prefer to preserve their independence by leaving the system.

In making such choice the German electorate would have to bear in mind that the risk of having to pay pro-rata for any potential losses incurred by the ECB in its operation to save the Euro, are more than made up by the great benefits Germany has received from being members of the Euro by way of enjoying a competitive exchange rate for their exports and low finance costs for their borrowing.

Somebody would have to explain to the German electorate how painful it would be if Germany were to be forced to re-adopt the Deutsche Mark which the BUBA evidently yearns for.


  1. Sorry but I cannot agree. The way the Euro was introduced was nothing less than criminal. One cannot start building a house by starting from the roof and then hoping for the best, maybe win a few elections in the process by showcasing just the glitter. Being a political project, the same politicians who implemented it are now closing their eyes and ears to the pain many citizens of the weak states are experiencing. It is a classic Utopian project gone awry. Italian Professor Luigi Zingales -

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  3. I don't disagree with you. We cannot change what happened and may be BUBA was right in arguing that the Euro should have been the final destination not the catalyst for the European project. But what has been done cannot be undone.

    And once the Euro was launched as a political project, politicans have to do what they have to do to save it even if this includes an element of solidarity which may involve fiscal transfers from the surplus to the deficit countries. I have always argued that regaining equilibrium should be a responsibility to be shared by both deficit and surplus countries. We cannot have all countries in surplus. We cannot make all Euro countries small images of Germany.