by John Ward
ANALYSIS: Why Berlin, Washington, the German Constitution, the Fiscal Union and the Greek bailout are unstoppable forces hitting immovable objects.
Quite a few of you will already be aware of the facts I’m about to discuss. What you might not have done is put them together in order to make more sense of German Chancellor Angela Merkel’s currently somewhat delicate situation.
Nine days ago on February 28th, The German Constitutional Court in Karlsruhe ruled that both the existing EFSF and its planned successor the ESM are unconstitutional in the Bundesrepublik. Even as things stand now, any use of EFSF funds approved by Merkel will be illegal. This is part of the reason why she and Wolfie Strangelove don’t want to talk about boosting it just yet, on the grounds that a bazooka will be just as illegal as a pea-shooter, only much more noticeable.
Nobody should be surprised, by the way, that the decision received very little MSM coverage, and Angela the Fuhrerine has thus far ignored it: the German Chancellor is neither libertarian nor democratic, as her real past demonstratesonce the airbrush element is discounted….and the largely europhile media are pretty adept at ignoring some of the means being applied to the Good Szechuan wife’s ends.
Merkel has parked the problem neatly for a week or two, but in the meantime more of those pesky fisco-economic boffins have revealed some awkward anomolies in the assets and stability of Mario Draghi’s European Central Bank (ECB). Helmut Schlesinger, former president of Germany’s Bundesbank, pointed Munich economist Hans-Werner Sinn at a worrying number: towards the end of 2010, records showed claims on other euro-zone central banks totaling over €300 billion. Surprised, Herr Sinn began to get forensic about it.
Since the 2007 financial crisis, huge sovereign debts have been run up with the ECB: a year on from the figure he’d been shown, the sums owed to the Bundesbank had zoomed to €498 billion….a circa 65% increase in one year. During any period of debt crisis, this sort of stuff will happen; however, should the eurozone fall apart, or Greece and/or others leave, the bad debt will be left behind. As Hans-Werner Sinn sums up:
“We’re caught in a trap. If the euro breaks apart, we’re left with an outstanding balance of nearly €500 billion, owed by a system that no longer exists.”
That’s over 150% of the German federal budget. Sinn believes this explains the desire “to save the euro, at almost any cost” as he puts it. It’s hard to argue with that based on behaviour to date; but it means that – if Germany is to be spared an horrendous bill – the eurozone has to reach the Promised Land called Fiskalpakt – and pronto. Only then would we see a binding legal agreement meaning that sovereign nations would remain intact, and thus severally liable for Die Rechnung.
This explains in part the immediacy with which, once Ireland had declared a referendum on Fiskalpakt, the Brussels Sprouts abandoned unanimity as a principle without asking any of us – imagine that – and decided that 12 out of 17 voting for it would be more than enough, don’t you know. (Last December, the outline ESM Treaty abandoned unanimity and dropped it to 85%: very quickly, we’re down to 65%. The draft Fiscal Treaty talks gaily of ‘majorities’. By the time Brussels has finished, it’ll be 0%. In any real sense, let’s face it, that’s the number already.)
Now the initial draft of the FiskalPakt also makes it crystal clear that once you’re in, you can’t get out. That’s the same mistake they made with the euro and the EU, but see above – several responsibility is the goal. For the ECB and – by definition, Berlin – it is Fiskal Union or bust….literally.
Here is the simple and yet impossible future Berlin now faces – which, if it’s alright with you, I’ve laid out line by line. That way, the logic is not just irrefutable…it’s obvious.
If Greece gets its bailout and stays in the eurozone, it will be part of the Fiscal Union. By then, nobody will be able to get it out.
The BundesCourt has ruled against ESM, but a central tenet of FiskalPakt is that it must boost the ESM ‘firewall’….against contagion from Greece – one of its members. The Berlin Government will be in breach of its constitution if it so much as signs the ESM in the summer.
So a Fiscal Union ‘infected’ by Greek problems will be far more open to further disasters…and lacking money to address them.
The Karlsruhe Court can be ignored for a time….but the Greek reality cannot. Greece must be allowed to default and leave the eurozone….otherwise the Fiscal Union will be at risk. And if that Union fails, so will Germany’s finances. There will be nothing left in Europe but the rubble of Babel’s Tower of Hubris.
This is just one more set of reasons why I remain convinced that Greece will be forced out before it has its spending money. It is still possible that, by the time the bondholder quorum, Greek pension funds, and a bit of creative ballot-stuffing have been tossed into the mix, Athens might scrape up to a ‘real’ 75% acceptance level by close of play tomorrow (Thursday). But as I’ve also written already, this will be the signal for the anti-bailout sector to go into overdrive.
Finally, I think too there is a vital point that has nothing to do with percentages, money or liberty – but everything to do with a Europe that is going to need financing (on the current model) for perhaps many decades to come. If Wall Street wriggles on the insurance, and on top of ECB Me Firstism, CACs are applied to even 10-15% of bondholders, sovereign credit suppliers are going to fight shy of anything in this theatre for years to come.
There is of course no memory shorter than that of a moneylender. But Hedge Funds (for all I find their contemporary form hateful) have indirectly bailed a lot of banks out in this sorry business. They will have their revenge…and it won’t bethat cold, methinks.