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September 13, 2011

NYT Presents False Choices - Ignores German Supreme Court Decision

Today's NYT piece on the German chancellor Merkel is rather weird: German Leader Faces Key Choices on Rescuing Euro:

As Europe struggles to reverse a plunge in financial confidence, the world waits for Germany’s chancellor, Angela Merkel, to make a fundamental choice.
Much hinges on getting all 17 nations in the euro zone to ratify the decisions of July 21, as the French Parliament has done, which includes an increase in the bailout fund and an expansion of its powers. Those decisions would already mark a shift in Germany’s harder-line positions on the euro.

An expanded European Financial Stability Facility would be able to act as a kind of bank, supported by all the members. It would be a significant step toward using Europe’s collective clout with debt markets to rescue countries with much weaker standing.
Eurobonds — issuing common European debt that any member of the currency zone could tap — is one popular solution among European Union officials in Brussels.

The article pretends that these "rescue" measures depend on Merkel's choice or ability.

That is nonsense.

An extended European Financial Stability Facility (EFSF) in the planned form of a permanent European Stabilization Mechanism (ESM), as well as Eurobonds, are no longer a choice. The German constitutional court, while allowing current temporary measures, last week prohibited those permanent measures.

It essentially decided that:

1. The right to budget decisions (taxing and spending) is the fundamental rights of any democratically elected parliament. The right of future parliaments to make budget decisions shall not be undermined by unlimited, permanent transfer decisions taken by the sitting parliament. Allowing such unlimited transfer decisions would take away all meaning of future democratic elections.

2. Therefore the German government and parliament are not allowed to approve of treaties which might undermine that budget right for future German parliaments. No mechanisms are allowed “which result in an assumption of liability for other states’ voluntary decisions, especially if they have consequences whose impact is difficult to calculate.”

3. Any extended ESFS would need German parliamentary approval each time it demands additional transfers of money. It would have to give the German parliament detailed reviews leaving it in control. But such an ESFS would not be able to give assurances or guarantees to anyone else as it would always depend on the next German parliament's vote. It would be useless.

4. Eurobonds as planned would allow a majority of Eurozone countries to just out vote Germany and issue a lot more Eurobonds than the German parliament would like while at the same time make German taxpayers liable for those bonds. That would undermine the German democracy. Therefore Germany can not take part in the planned Eurobond scheme.

Any change in the above would need a change in the German constitution and a public referendum on those changes. With 75% of all Germans against bailouts that is not going to happen.

But the NYT piece does not even mention the court's decisions. It presents choices for Merkel to make that no longer exist.

What then is the purpose of that piece?

Posted by b on September 13, 2011 at 5:45 UTC | Permalink


to keep the house of cards standing?

Posted by: somebody | Sep 13 2011 5:50 utc | 1

It’s a look
This game we play
We can’t escape
We have to attend
It’s life you see

"Lonely Carousel"...

Posted by: Uncle | Sep 13 2011 9:22 utc | 2

"With 75% of all Germans against bailouts that is not going to happen."

Hope you're right b, but, sometimes the "powers that be" bypass the will of the people. It happens daily, here across the pond.

Posted by: ben | Sep 13 2011 14:03 utc | 3

You could hire Zapatero to change the constitution in two weeks -:)

Posted by: auskalo | Sep 13 2011 14:04 utc | 4

The NYT probably knows Germany's hands are tied. This is right-wingers looking for someone to blame for one of their dopey plots. They're worried about a run on the banks. It'll probably start in the EU but it doesn't matter where it begins, it'll go global within a week.
Late last week the Oz Govt announced that it would guarantee all bank deposits. They did that at the beginning of the S-P crisis in '08. Back then, the ceiling was $1 million per account/depositor (I forget which). This time the ceiling is $100,000. So one may safely conclude that the 'global banking community' is expecting trouble with a capital T.

Posted by: Hoarsewhisperer | Sep 13 2011 14:30 utc | 5

Why worry, we all go bankrupt anyway as debts are raising to astronomical heights and can't be stopped anymore.
One day we all have to start from zero like Argentine a few years ago.

Posted by: learn german | Sep 13 2011 16:21 utc | 6

Hoarsewhispherer - which government did this? Thnx.

Google says Australia is lowering its insurance cap from $1M to $250,000...or do I have the wrong government? Or am missing something?

Posted by: jawbone | Sep 13 2011 18:59 utc | 7

The New York Times is masking an honest mistake: everything the Constitutional Court said is equally applicable to the US. But the Rule of Law has long been discarded and the Times has simply forgotten that the President cannot, legally, do whatever he pleases though, in fact, he can get away with serial murder.

If a coup takes place in the world and none of the media report it, is there still a constitutional government? Or has a coup taken place?

Posted by: bevin | Sep 13 2011 22:29 utc | 8

"...making an honest mistake.."

Posted by: bevin | Sep 13 2011 22:30 utc | 9

Martin Wolf: Time for Germany to make its fateful choice

"Today, raging fire must be put out. Only then can attempts at building a more fireproof eurozone begin. The least bad option would be for the ECB to ensure liquidity for solvent governments and financial institutions, without limit. It should not, in fact, be intellectually difficult to argue that buying bonds is compatible with continued monetary stability, since broad money has been growing at a mere 2 per cent a year. It is sure to be politically hard, however, particularly for Mario Draghi, the incoming Italian ECB president. Yet it is what has to be done given the inadequate size of the European financial stability facility if called on to help larger beleaguered euro-member countries. Politicians must then dare to support such action.
What should happen if the German government decided that it could not support such a bold step? The ECB should go ahead anyway rather than let a cascading collapse unfold. It would then be up to Germany to decide whether to leave, perhaps with Austria, the Netherlands and Finland. The German people should be made aware that the results would include a soaring exchange rate, a massive decline in the profitability of Germany's exports, a huge financial shock and a sharp fall in gross domestic product. All this would be apart from the failure of two generations of efforts to build a strong European framework around Germany itself.

Germany possesses a binding veto over efforts to expand official fiscal support. But it is losing control over its central bank. In a crisis so menacing to Europe and the world, the one European institution with the capacity to act on the requisite scale should dare to do so, since the costs of not doing so are bound to prove devastating. That will surely create a political crisis, but this would be better than the financial crisis unleashed by a failure to try."

Posted by: auskalo | Sep 14 2011 0:54 utc | 10

Re jawbone @ #7.
I was referring to the Australian Govt.
There was a radio news report focused on the difference between the 2008 ceiling of $1 million, and the current one.
It's possible that I mis-heard the figure of $100K but I don't think so. I remember thinking, at the time, that it was a big reduction. It doesn't concern me personally or directly and I didn't follow it up.

I assume the purpose of a govt guarantee is a preventive measure. The $1 Million guarantee worked extremely well and dispelled (almost) everyone's fears immediately.

$100k (if that's the correct figure) has a much broader lack of appeal than $1 m, and seems like a guarantee which the govt expects to be called upon to honour - to some extent.

My understanding is that Oz's trade deficit is high but govt debt is a very small proportion of GDP compared with most Western economies.

Posted by: Hoarsewhisperer | Sep 14 2011 1:14 utc | 11

I have since Googled the revised Govt bank deposit guarantee and found references to it on the websites of several Oz banks. Each of them state that the revised limit is A$250k as jawbone asserted. The guarantee is per depositor, not per account.

Posted by: Hoarsewhisperer | Sep 15 2011 1:00 utc | 12

T/U, Hoarsewhisperer (luv your nym)

Posted by: jawbone | Sep 15 2011 23:12 utc | 13

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