It is Wednesday and I have a lot of commitments and deadlines hanging over me today. But I thought I would briefly comment on the yesterday’s – Decision – by the Bundesverfassungsgericht (German Federal Constitutional Court) (May 5, 2020) on the legality of the ECB’s Public Sector Purchase Programme. The BVerfG concluded that the ECB has been operating ultra vires and made orders as appropriate, which bind the German government and the Bundesbank and demonstrate once again the myth of central bank independence. There is all sorts of angst being expressed out there about this decision and progressive Europhiles are almost apoplectic. But it won’t surprise you to know that I think the Court made the correct judgement by exposing the complete sham that the European Union and the Eurozone, in particular, has become – an illegal, look-the-other-way, neoliberal cabal that the Union has become.
The BVerfG decision and its implications
I have written about his issue previously – European Court of Justice effectively rules that Eurozone is a shambles (June 29, 2015).
I also covered the matter in detail in my book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).
Yesterday’s BVerfG decision was directed at the PSPP rather than the PEPP, although we can expect a new petition to the Court on the PEPP and the same principles will be entertained.
I haven’t yet read the complete decision – it is very long and I am about 3/4 the way through it as I type.
The – ECB decisions on the Public Sector Purchase Programme exceed EU competences (May 5, 2020) – press release is very detailed and gives one enough of the facts to be able to assess the facts and import.
The essence of the decision is that:
1. The BVerfG rules that:
… the Federal Government and the German Bundestag violated the complainants’ rights under Art. 38(1) first sentence in conjunction with Art. 20(1) and (2), and Art. 79(3) of the Basic Law (Grundgesetz – GG) by failing to take steps challenging that the ECB, in its decisions on the adoption and implementation of the PSPP, neither assessed nor substantiated that the measures provided for in these decisions satisfy the principle of proportionality.
Proportionality is a ‘principle’ built into the TEU (Articles 5(1) and 5(4)) which relate to the “division of competencies between the European Union and the Member States”.
In this case, the intent of the ruling was to question whether the ECB’s behaviour was commensurate with its stated monetary policy objectives.
But it is clear that the Treaties never considered the ECB would play a major fiscal policy role, which in the climate of austerity imposed by the Commission on Member States, became essential if the common currency was to survive. See more below.
The point is that the Commission is now caught in a web of its own making.
On the one hand, it has made it impossible for Member States to maintain high levels of prosperity. Member States move between various degrees of crisis as they try to stay within the ‘unworkable’ fiscal rules.
On the other hand, the ECB, which was entrusted with monetary policy, has been forced by the austerity bias to become a sort of de facto fiscal agent, which the Treaties claim (via subsidiarity etc) is the sole domain of the Member States.
This is what the BVerfG is ruling against.
But in doing so, it is confusing the situation even more.
As point (3) below shows, the BVerfG doesn’t rule against the PSPP in the context of “monetary financing of Member State budgets”.
But the ECB is doing exactly that while whistling a different tune and everyone is playing along with the charade.
It seems the way the BVerfG is trying to get to this point is via the “proportionality” concept.
Importantly, the BVerfG considered the German government had not established whether the ECB’s legal mandate had been exceeded by the PSPP and “the Federal Government and the German Bundestag have a duty to take active steps against the PSPP in its current form.”
Goodbye the pretence of central bank independence.
The Court didn’t exactly declare the PSPP to be illegal – it said that it couldn’t decide because the German government hadn’t done its job properly.
But, the Court ruled that:
… the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme.
Expect more smoke and mirrors.
2. A major bombshell came with its ruling that the December 11, 2018 decision by the Court of Justice of the European Union (CJEU) on the legality of the PSPP is to be disregarded because:
The review undertaken by the CJEU with regard to whether the ECB’s decisions on the PSPP satisfy the principle of proportionality is not comprehensible; to this extent, the judgment was thus rendered ultra vires.
The BVerfG had originally sent the case to the CJEU, which had ruled that there was no reason to declare the PSPP invalid.
At the time, it was clear that the major issues the BVerfG had sought rulings on – which related to whether the ECB PSPP was compromising the democratic capacity of the German state – were not dealt with in the CJEU ruling and this is behind the decision by the BVerfG to assert that the CJEU has no standing in this matter.
That will have huge implications for Member States who want to go it alone. The media is already talking about rogue states like Poland and Hungary using their own judicial processes to declare EU law as espoused by the CJEU to be irrelevant to their nations.
Divergence is once again the hallmark of the whole show.
3. Surprisingly, “the Federal Constitutional Court did not find a violation of the prohibition of monetary financing of Member State budgets”.
The BVerfG was worried that:
… if the Member States were to completely refrain from conducting any kind of ultra vires review, they would grant EU organs exclusive authority over the Treaties even in cases where the EU adopts a legal interpretation that would essentially amount to a treaty amendment or an expansion of its competences …
… the Member States remain the ‘Masters of the Treaties’ and the EU has not evolved into a federal state.
This is where I believe the Court is mistaken.
What the decision really highlights is the failed architecture of the monetary union.
As I have indicated before, when the ECB began its Securities Markets Program (SMP) in May 2010 to save Member States from insolvency as bond yield spreads against the bund were increasing sharply, it tried to claim that they were just engaging in monetary policy operations to manage liquidity.
Central banks use open-market operations (OMO) – exchanging government bonds for reserves in either direction with the commercial banks – to manage the reserves and maintain control of their policy target rates.
Please read the following introductory suite of blogs for more on this:
1. Deficit spending 101 – Part 1 (February 21, 2009).
2. Deficit spending 101 – Part 2 (February 23, 2009).
3. Deficit spending 101 – Part 3 (March 2, 2009).
But the SMP began the massive increase in bond holdings on the ECB’s balance sheet.
The obvious question that has never been answered – because the answer is obvious – is why did the normal operations of monetary policy and specifically liquidity management (reserve maintenance) require such a dramatic accumulation of assets after 2009?
After introducing the SMP program the ECB accelerated their purchases of Member State government bonds at times when the difference between the yields on some Member State government bonds against the benchmark bond, the German bund (the ‘spreads’) were widening significantly.
The initial spike in purchases from May 2011 was associated with the escalation in spreads on bonds issued by Greece, Ireland, Portugal and Spain.
A second, larger acquisitions began in August 2011 and were mostly associated with the sharp rise in the spread on Italian government bonds, which went from 1.5 percentage points in April 2011 to a peak of 5.2 percentage points in November 2011.
The large-scale ECB buying stabilised the Italian bond spreads by the end of 2011 and by April 2014, they had fallen back to 1.77 percentage points.
Given the size and importance of the Italian economy to Europe, the ECB was clearly not going to allow the Italian spreads to rise as quickly or as far as the Greek spreads had risen.
The SMP purchases effectively allowed the relevant governments to ignore the bond markets, which meant that the size of the spreads were moot anyway.
After the SMP was launched, a number of ECB’s official members gave speeches claiming that the program was necessary to maintain normal monetary policy operations (liquidity management).
For example, on October 21, 2011, ECB Board Member, José Manuel González-Páramo gave a speech in Málaga – The ECB’s monetary policy during the crisis – said that the huge government bond purchases were part of:
… a functioning monetary policy transmission mechanism by promoting the functioning of certain key government and private bond segments.
In other words, by placing the SMP in the realm of normal weekly central bank liquidity management operations, they were trying to disabuse any notion that they were funding government deficits.
This was to quell criticisms, from the likes of the Bundesbank and others, that the program contravened Article 123 of the Treaty of the European Union.
In early 2011, the fiscally-conservative boss of the Bundesbank, Axel Weber, who was being touted to replace Jean-Claude Trichet as head of the ECB, announced he was resigning, ostensibly in protest of the SMP and the bailouts offered to Greece and Portugal.
I noted in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – that Weber breached ECB protocols by publicly criticising the SMP program.
In a notable speech on October 12, 2010 in New York City – Monetary policy after the crisis – a European perspective – Axel Weber claimed that the SMP was largely ineffective but risked:
… blurring the different responsibilities between fiscal and monetary policy. As the risks associated with the SMP outweigh its benefits, these securities purchases should now be phased out permanently as part of our non-standard policy measures.
He clearly knew that the bond purchases were nothing to do with the daily liquidity management and reserve maintenance procedures of the ECB but had, instead, become a default fiscal intervention to fund Member State deficits and keep these governments from insolvency.
Another ECB Executive Board member, Jürgen Stark also resigned in protest over the SMP in November 2011. Stark told the Austrian daily, ‘Die Presse’ that the ECB was heading in the wrong direction by pushing aside the crucial no bailout clauses that provided the bedrock of the EMU.
Weber’s successor as head of the Bundesbank, Jens Weidmann maintained the criticism, albeit in a more muted manner.
Whatever spin one wants to put on the SMP and its later QE incarnations, it was unambiguously a fiscal bailout package.
Weidmann was correct in that sense. The SMP amounted to the central bank ensuring that troubled governments could continue to function (albeit under the strain of austerity) rather than collapse into insolvency.
The QE reality was that the ECB was bailing out governments by buying their debt and eliminating the risk of insolvency.
QE demonstrated to everyone, that the ECB was caught in a bind.
It repeatedly claimed that it was not responsible for resolving the crisis but, at the same time, it realised that as the currency-issuer, it was the only EMU institution that had the capacity to provide resolution.
The SMP saved the Eurozone from breakup and the later versions maintained the solvency of governments.
QE was never about giving the banks more money to loan out. Bank lending is never constrained by a lack of reserves. Rather lending requires credit-worthy customers seeking loans. At the height of the crisis as banks tightened their lending criteria in the face of increasing financial uncertainty, there was a dearth of such customers.
While the SMP saved the Eurozone from breakup, it remained a failed vision for European prosperity because it didn’t address the core problem: Southern Europe was in depression and the only way out is for fiscal deficits to expand.
The ECB clearly signalled a willingness to buy unlimited quantities of government bonds if there was the risk of insolvency. But this intervention required that the countries succumb to a fiscal austerity package that ensured their growth prospects are minimal.
And it has carried on that practice into the current PEPP bond purchases.
There is no doubt that if the ECB wasn’t engaging in this way, several Member State governments would be rendered insolvent Italy, Spain, probably Greece, Portugal and soon after France.
There is also no doubt the ECB is funding the deficits that are now growing substantially.
The primary bond dealers know they can offload the debt at a nice capital gain to the ECB so have no fears of credit risk.
The BVerfG is also choosing to overlook all this.
The ECB put out this press release in response (May 5, 2020) – ECB takes note of German Federal Constitutional Court ruling and remains fully committed to its mandate.
Essentially saying that we have read the judgement and will continue to do what we are doing anyway.
They appealed to the authority of the Court of Justice of the European Union (CJEU), which ruled in December 2018, that the ECB’s smoke and mirrors behaviour that everyone knows is illegal is legal.
The German court decision indicated that the CJEU “clearly fails to give sufficient effect to the principle of conferral and paves the way for a continual erosion of Member State competences.”
The decision also has consequences for the on-going Brexit negotiations.
There is no way that the EU’s negotiator (Barnier) can insist on Britain agreeing to punitive ‘single market’ rules when the way policy is evolving across the Continent suggest that Member States are certainly trying to do their own thing.
What a system!
Call for MMTed Support
We are making progress in developing the program that will become – MMTed.
In about two weeks, we will launch a new WWW site and our weekly MMTed Q&A live show.
Course details will follow soon to facilitate an on-line curricula that is being developed.
But we still need significant sponsors for this venture to ensure that we can run the educational program with negligible fees.
If you are able to help on an ongoing basis that would be great. But we will also be appreciate of once-off and small donations as your capacity allows
You can contribute in one of three two ways:
1. Via PayPal – which is our preferred vehicle for receiving donations.
The PayPal donation button is available via the MMTed Home Page or via the – Donation button – on the right-hand menu of this page (below the calendar).
2. Direct to MMTed’s Bank Account.
Please write to me to request account details.
Please help if you can.
We cannot make the MMTed project viable on a sustainable basis without funding support.
We will always maintain strict anonymity with respect to donations received, except if the donor desires to be publicly associated with the venture and gives their permission in writing to appear on the Donors Page.
Thanks so far to all the kind donors. We are really appreciative.
Music – Sad news
One of my absolute favourite drummers – Tony Allen – died last week (April 30, 2020) at the age of 79.
Regular readers may recall that recently I wrote this report – Be careful not to get ahead of ourselves – hard-edged class struggle will be necessary (April 8, 2020) – which included some information about my latest album purchase – Rejoice – which was the release of the collaboration between the master Nigerian drummer and the late South African horn player – Hugh Masekela.
It is such a good album.
Tony Allen has spent March 2020 promoting the album doing some live gigs in London.
Here is a UK Guardian – Tony Allen Obituary (May 3, 2020) – which tells you more than I can about his life and legacy.
Here is a track from a live concert at the Mayan Theater in Los Angeles, recorded July 21, 2013.
These big shows were masterpieces. Everyone doing a little to make something huge.
And here his tribute to bop drummer Art Blakely, live on February 19, 2016 at the Sons d’Hiver festival in France.
That is enough for today!
(c) Copyright 2020 William Mitchell. All Rights Reserved.