Markets were breathing a sigh of relief this morning, with DOW futures up by 376 points, in the wake of a pronouncement, from Europe’s finance ministers, that promises up to $950 billion to stabilize nations in the eurozone. People, however, are not looking very carefully. At first glance, it does appear to be a massive giveaway program that will funnel bailouts to Europe’s big banks through various insolvent sovereigns. Indeed, when looked at in the abstract, it seems to be on the scale of the TARP program in America, or the Federal Reserve’s grab-bag money giveaway marathon. A more careful reading, however, shows something quite different.
The stabilization fund has a maximum value of 750 billion Euros, but that does not mean that the EU intends to inject that much money into the financial system, the way the Fed injected $1.75 trillion between March 2009 and April 2010. First, the money will only be delivered to a eurozone nation that is about to default, and, second, the delivery will only occur if, like Greece, the newly insolvent sovereigns agree to severe austerity measures. Beyond that, based upon the statement that came out on Saturday, there is every reason to believe that the northern European countries will be putting intense pressure on their sisters to the south to cut budgets BEFORE things get that bad.
Perhaps, most important, the eurozone Finance Ministers do not have uncontrolled discretion to commit their nations to this type of program. In Germany, for example, the Parliament must approve such agreements. With status quo forces having lost control of the upper house, during Germany's most recent election, that may not be easy. Similar post-declaration approval problems may occur in other eurozone countries.
The massive $150 billion giveaway to banks who own Greek debt is now joined by this equally foolish program. However, just as Greece will eventually default on its debts, so will the other nations who receive funds from the new programs. In the long run, it does not matter who "guarantees" the debt. These programs merely shift the cost from the banks that made the mistake of buying the bonds of insolvent nations to the taxpayers of northern Europe (and, secondarily, to taxpayers in the U.K. and U.S.A. through the IMF).
Neither this pronouncement, nor the bailout package for Greece before it, can do anything to prevent a sovereign nation from refusing to make payments on its debt. And, refuse to make they will. It is only a matter of time. When people riot in the streets as a result of possible hardships, as we have seen in Greece, can you imagine what will happen when the hardships are actually imposed upon them? I suggest that the governments that made agreements to impose austerity will be thrown out of office, unless they reneg, and the taxpayers of countries that have guaranteed the debt, will end up paying the bill.
The bold $1 trillion "support" pronouncement is, therefore, just a lot of hot air. The austerity that comes with this "support" will tank the southern European tier countries, or will bankrupt the northern countries, if the southerners refuse to pay. The real question is the extent to which the big Euro-banks who control the European Central Bank (ECB) will be allowed to avoid the laws that established it. Article 127 of the European Union Treaty provides that:
1. The primary objective of the European System of Central Banks (hereinafter referred to as "the ESCB") shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 119.[i]
Section 119 of the Treaty provides that the member states shall create the Euro, and, in doing so, will act in a such a manner as to “insure stable prices, sound public finances and monetary conditions and a sustainable balance of payments.”
Article 122 of the EU treaty forbids the ECB from monetizing debt by buying the bonds of its member states. The legislative history of this section clearly indicates that it was installed under German pressure, specifically to prevent monetization of debts. While the ECB is permitted to buy bonds in the secondary market, in order to implement the normal flow of monetary policy, attempt to skirt the prohibition against monetization of debt will surely be met with a successful legal challenge. It is doubtful that law courts, with a large contingent of judges that come from eurozone nations in which corruption is not running rampant, like Germany, Luxembourg, the Netherlands, and France will allow the treaty to be broken by technical claims.
If the ECB attempts to monetize debt by purchasing bonds in the secondary market in order to support failing member budgets, it will find itself slapped with an injunction. A group of German law professors has already challenged German participation in the bailout of Greece, in the German Constitutional Court. Although they did not succeed in obtaining an injunction, their case is strong, and they may yet succeed. Getting an injunction against money printing by the ECB, through so-called “quantitative easing” is a much stronger case.
Given the heavy influence of the large European banks that hold potentially defaulting debt instruments, I anticipate that the ECB will try to print money. I also anticipate that, just as American courts are now forcing a secretive Federal Reserve to disclose the persons to whom it gave taxpayer money, the European courts will slap the ECB with an injunction against monetizing sovereign debts.
In short, the bold pronouncement of the European Finance Ministers may buy some time as confusion takes hold in the market, but most of what they have announced is nothing but a lot of hot air.
Disclosure: No positions