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Christopher Mahoney
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I spent eight years at Bank of America in New York (1978-86) covering Wall Street, then moved to Moody's Investors Service where I worked for 22 years, covering banks, sovereigns and corporates. I chaired the Credit Policy Committee for four years. I retired in 2007 as vice chairman. PLEASE... More
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Capitalism and Freeedom
  • A Brief Introduction To German Constitutional Law 0 comments
    Sep 14, 2012 10:29 PM

    Excerpts from the Sept. 12th decision of the Federal Constitutional Court:
    "The ESM Treaty may only ratified if, at the same time, it is ensured under international law that the limitation of liability limits the amount of all payment obligations arising to the Federal Republic of Germany from this Treaty to its share [EUR 190 billion] in the authorised capital stock of the ESM and that no provision of this Treaty may be interpreted in a way that establishes higher payment obligations for the Federal Republic of Germany without the agreement of the German representative.
    "The German Bundestag is prohibited from establishing mechanisms of considerable financial importance which may result in incalculable burdens with budget significance being incurred without the mandatory approval of the Bundestag.
    "To what extent the decision taken by the Governing Council of the European Central Bank on 6 September 2012 on a programme concerning the purchase of government bonds of financially weak Member States whose currency is the euro complies with these legal requirements was not a matter for decision in the present proceedings."

    For my sins, I actually read the Constitutional Court's entire decision (in translation). I have excerpted what I think are the crucial parts. The court permitted the government to sign the ESM treaty on the proviso that it does not bind Germany to future expenditures beyond its initial capital contribution of EUR 190 billion. The Court did not express an opinion concerning Draghi's OMT, although plaintiffs had asked it to do so.

    The court's decision has been widely interpreted as a green light for greater fiscal integration. Indeed, Jose Manuel Barroso, the president of the European commission, called for a federal European state in his annual "state of the union" address: "I call for a democratic federation of nation states that can tackle our common problems, through the sharing of sovereignty." Barroso said that a federation of Europe is "unavoidable" if Europe's embattled common currency is to survive the financial crisis. His aides said that he plans to recommend a plan for common eurozone bonds.

    Somehow I fear that the president of the European Commission may not yet have read the Constitutional Court's decision. It is as if the Court said the opposite of what it said, or that what it said doesn't matter. The Court specifically prohibited the ratification of any treaty that bound Germany to pay or owe any more money than EUR 190 billion, which absolutely excludes the possibility of a eurobonds or a fiscal union. As best as I can tell, it also ruled out the idea of the ESM's leveraging itself by borrowing from the ECB or the capital market.

    In my view, this means that the ESM will be quite limited in scale, and will not be big enough to be helpful to either Spain or Italy. It will merely serve as the gateway to the ECB's bond buying program--which will be challenged before this court.

    If Barroso is correct that only a federation can save the eurozone, Germany's constitution will need to start "evolving" very quickly.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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