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On June 11 and 12, 2013 the German Constitutional Court will be considering the legal foundations of the European Stability Mechanism (ESM) and the Outright Monetary Transactions (OMT) of the European Central Bank (the Bruegel blog has an informative press review on the subject). This case is of great interest for a number of reasons which stretch beyond the confines of the realm of European political economy, into areas of constitutional law and institutional order or, more bluntly, to what effectively amounts to an incessant power struggle between the various strata of authority within the EU architecture, mainly manifested in the usually self-defeating tension between the supranational and the national levels. The decision of the German Constitutional Court on this very issue might well be of historical importance in setting a clear precedent on the delineation of competences between the Court of Justice of the EU and the national constitutional courts, tacitly though clearly removing some of the competence uncertainty that prevails over certain legal-political aspects of the present state of affairs and reducing the speculative scope of reactionary politics or, conversely, of reinforcing the skepticism over the supremacy of European law in those cases where conceptual lacunae may exist or made to exist.
Interesting as this conundrum can be, those not willing to engage in legal-economic hermeneutics and who would rather strip away all the semantic superficialities related to the forthcoming adjudication of the German Constitutional Court, must seek to identify in the dynamics that are in operation any indication on the existence of flaws in the design of the scaffolds that have been erected to support the trembling Euro edifice, in particular, concerning the inherent contradiction between the presumably “unlimited” demand for sovereign bonds in the secondary markets that the ECB would offer for the countries subject to the OMT programme, with the strict conditionality clauses that are attached to it, which are directly linked to the cumbersome workings of such a dubious inter-governmental concoction as the ESM.
Venturing to make sense of the internal antinomy of the OMT, one must start from taking account of the two main components of the programme:
- bond buying: the purchase by the ECB of unlimited (not predetermined) quantities of sovereign bonds in the secondary markets that have a maximum maturity of 3 years, with the latter detail being of cardinal importance in enabling the OMT to qualify as a tool for capital market operations that are meant to correct imbalances in the money/capital markets, ensure short-term financial stability and, above all, be bestowed with the patina of “liquidity measures” rather than that of “indirect budget financing”;
- conditionality: the strict conditionality clauses a Member State will have to agree and fully comply with, within the framework of a memorandum of understanding between it and an inter-governmental macroeconomic adjustment mechanism that will stipulate narrow economic objectives, rigid budget targets and the robust allocation of authority among the EU’s technocratic experts of fiscal orthodoxy and the state’s administrative entities. These shall be the preconditions a Member State will have to satisfy in order to be granted access to this much-touted cornucopia furnished upon it by the monetary function.
On the face of it, these two aspects of the OMT may appear to be complementary to one another, given that it is customary to provide a good or a service under certain conditions in the expectation or explicit agreement of receiving something in return, be it corporeal or not. Alas, this kind of decontextualized ethical consideration would fall lamentably amiss, in so far as it would blithely neglect the specific constellation of forces that shall be tasked to elucidate, monitor and enforce the conditions entailed in any OMT programme. As the statement of the ECB on the features of the OMT clearly notes:
A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.
The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.
Being aware of the inter-governmental setup of the ESM and of the complexity of its decision-making processes, we must have the honesty to recognize that the custodian for the implementation of the OMT’s conditionality clauses shall be none other than an inter-governmental amalgam, a “troika” of some sort, similar or identical to the ad hoc power structure of the bailout mechanisms that were conceived ex nihilo to provide pampers to bankrupt Member States as well as their respective banking cronies and, of course, to enact a deleterious remedy of inane tax hikes and budget cuts in the midst of a recessionary climate, featuring institutional uncertainty, whilst resources across the economy were and continue to remain idle and subject to depreciation.
For those conscious of the complications germane to the inter-governmental arrangements of the troika, which were established as a convenient fig leaf of legality to the otherwise clear violation of the no-bailout clause (litanies to the contrary notwithstanding), the method of approval by all national parliaments, while attaining the democratic formality, is in effect a veto power of any single state against the joint decisions and general orientations of the rest of the EU/Eurozone. In practical terms, any single national parliament faced with the decision to approve or to cast to the wind any agreement that involves fiscal, budgetary and economic policies, couched in terms of an OMT-ESM programme of macroeconomic adjustment, can decide unilaterally on the inefficacy of the whole scheme, or on the undesirability of specific aspects of the given arrangements; and will, if it has the capacity, adopt an obstinate opposition to anything but a political agenda pursuant to whatever magma of significations it perceives as prudent and virtuous, without considering the broader implications of this one-sided drive for control.
Put differently, if we were to assume that in the weeks ahead Spain and/or Italy (with France deep in the horizon) apply for the implementation of the OMT, they will have to sign their memoranda of understanding with all of their partners and the ESM and will then have to wait for the ratification of these agreements by, say, the German Bundestag which already is quite skeptical of both the legality and economic merits of the OMT (let alone the political opportunism that runs rampant in certain circles when the time of elections nears). In such a balance of forces reminiscent of what game theorists refer to as a “zero sum game”, the greatest loser, apart from the Euro, the European integration process and the Member States collectively, would be the ECB whose credibility over its promise to buy “unlimited” quantities of sovereign bonds would be shattered into pieces by the myopic power plays of nation-states or vainglorious demagogues or other political forces within these states who would seek to abuse this veto right with impunity in order to introduce whatever new conditions they find appropriate to the attainment of their own ends (such as those infamous arbitrary conditions that the Eurogroup and the European Council come up with at the early morning hours of their summits).
To be sure, there is little doubt that with the OMT in place the ECB is clearly stating its willingness to effectively perform the function of a dealer of last resort in shaping expectations and conducting corrective measures on the fiscal front (though they will never refer to it as “fiscal”) provided that a troika-style memorandum of understanding between the Member State in need of support and its EU partners is signed and ratified by all participating national parliaments. Nevertheless and being true to my cynicism, I should suggest that good intentions and bona fide actions will do little to impress investors, for if the ECB can no longer pose as the pillar of credibility it makes itself to be, the market expectations concerning the presence of convertibility risks could be brought to the fore once again and, if such concerns were to re-emerge, this time poised with greater vengeance, there would be very little the ECB could do to mitigate them effectively, for a central bank that remains confined to such a post-modern “Babylonian Captivity” can hardly perform its role in administering the monetary affairs of a currency area—it is effectively rendered obsolete.
Lastly and as a reminder, the OMT, which was officially introduced on September 6 2012 and has yet to be implemented, has hitherto been peddled as the panacea to the fragmentation of the Euro area’s financial system. Mr. Mario Draghi, the ECB chief, has even been engaging in a meticulous exercise in obfuscation by branding the immediate effects of the OMT as “positive contagion”; an impulse that would presumably and somewhat talismanically contribute to the re-invigoration of interbank lending, while restoring the effectiveness of monetary policy transmission mechanisms in supplying affordable credit to the real economy. The arguments along these lines certainly have their merits and are predicated on sound tenets of thought, however it would be a sign of puerile naivety to passively receive, with an affirmative predisposition, the tissues of self-congratulating statements propounded by those holding key positions of power, especially when the palaver involved performs the function of providing obscurantist apologetics to ill-conceived and maladministered responses to an economic crisis that could have been decisively addressed with much less pain and effort in the absence of narrow-minded sectarianism across and within Member States together with the concomitant and inopportune compartmentalization of the European political sphere.
The preconditions to the OMT which can easily provide the fundament upon which ad hoc decisions will be established; and the very fact that the entire venture can be jeopardized by the ruling of a national constitutional court, which will effectively be deciding on the fate of the whole Euro area rather than its respective legal order, clearly illustrate the absence of a firm political foundation on which to found a strategy aiming to put an end to this crisis. It also fosters profound uncertainty on the longer-term sustainability of the whole range of special entities or programmes, introduced amid this eurocrisis, by virtue of inter-governmental expedience, as inadequate and pitiful substitutes to decisive, holistic, systematic and concerted action on the fiscal, monetary and financial fronts. The OMT and the ESM are but two of these concoctions and their resistance to the vicissitudes of realpolitik will be put to the test, perhaps more than once, while the rest of us will be waiting for institutional predictability and foreseeability to be restored or for arbitrariness of decisions to be perpetuated.
Picture: The Reichstag building in Berlin. Credit: Wikipedia