ECB in court

June 10, 2013

The major euro zone event of the week starts on Tuesday when Germany’s top court – the Constitutional Court in Karlrsuhe – holds a two-day hearing to study complaints about the ESM euro zone bailout fund and the European Central Bank’s still-unused mechanism to buy euro zone government bonds.

The case against the latter was lodged by more than 35,000 plaintiffs. Feelings clearly run high about this despite the extraordinary calming effect the mere threat of the programme has had on the euro debt crisis. Some in Germany, including the Bundesbank, are worried that the so-called OMT could compromise the ECB’s independence and would be hard to stop once launched.

A verdict won’t be delivered until later in the year but already there is already jockeying for position. Germany’s Spiegel reported that a limit had been set on the amount of bonds the ECB could buy – directly contradicting what Mario Draghi has said. That was swiftly and categorically denied by the ECB, then Executive Board Member Joerg Asmussen warned there would be “significant consequences” if Germany’s constitutional court rules the bond-buying programme was illegal.

Draghi got his retaliation in first last week, saying the OMT had proved probably to be the world’s most successful monetary policy gambit. Given the dramatic fall in euro zone borrowing costs, he has a claim. French President Francois Hollande’s weekend assertion that the euro crisis is over looks a little more shaky.

Asmussen will represent the ECB in Karslruhe while his friend Jens Weidmann will put the Bundesbank case. Weidmann is speaking today as are a clutch of other ECB policymakers.

The history of the court’s rulings during the crisis has been not to block anything but to give greater oversight to German lawmakers. This time it is expected to uphold its preliminary verdict from last September that the ESM does not violate German law and can go ahead. The German government also expects the court not to rule against the ECB’s pledge to buy bonds from stricken euro zone states if needed.

This is the sort of stuff that markets find hard to price in so there will be a degree of nervousness, and a great deal of attention focused on the red-robed judges. Because the ruling affects the ECB – a pan EU institution – the court may defer to the European Court of Justice this time. That, legal experts say, would make an unalloyed judicial blessing for the OMT far more likely. Either way, we may not hear the judgment until after Germany’s September elections.

After finally putting together a coalition government, Italy has slipped off the radar somewhat but now it is back. The first round of voting in Sicilian municipal elections takes place which, together with Rome’s election of a mayor, marks the first big popular test since the formation of Enrico Letta’s grand coalition government of left and right.

Unsurprisingly, there is already friction in the coalition with Silvio Berlusconi’s group pressing for big tax cuts which the heavily indebted state simply can’t afford. The votes will also be a big test of the anti-establishment 5-Star movement, whose strong showing at February elections upset the political status quo, but which has seen a slide in its support since. Letta holds a news conference with Irish premier Enda Kenny this afternoon.

EU/IMF inspectors return to Athens for a look at the books in the week to come after a period when investors have piled into Greek bonds. In reality, Greece is almost certain to require another debt writedown and this time it will fall squarely on euro zone governments (i.e. their taxpayers).

That will be an interesting notion for Angela Merkel to sell to her public so don’t expect a hint before the September elections. But the facts are Greece remains deep in recession (its economy shrank 5.6 percent year-on-year in the first quarter), unemployment is at 27 percent, its debt pile remains mountainous and its privatization progress has been stop-start.

The inspectors return after a row broke out between the IMF and Brussels. The former said the first bailout of Athens could have been handled better with hindsight and the European Commission retorting that hindsight is a wonderful luxury that was not available at the time.

It’s worth remembering that in 2010, the world was staring into the abyss and anything that prevented an unruly default was better than the alternative. If that required a certain amount of heroic belief that the numbers would eventually add up, then so be it, ditto for the need to avoid a debt restructuring at that stage which would have threatened a massive contagion effect because no mechanisms were in place to protect other vulnerable countries from an investors’ strike.

Some Greek politicians have wasted no time in asserting that the IMF’s mea culpa argues for less austerity. We will run an analysis of how grim the Greek economic and debt numbers still look. Greece’s deputy finance minister will unveil latest government budget data.

Markets have been thrown into turmoil since Ben Bernanke signalled the Federal Reserve could begin slowing its bond-buying with new money before the year is out. Emerging markets have borne the brunt. One consequence has been a “good news is bad” effect where strong data, particularly in the United States, unnerves investors because it could hasten a shift of tack by the Fed. German Bund futures have opened flat and European stock futures are pointing south after Chinese figures suggested growth is ebbing.

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