The euro zone owes much of its continued existence to the European Central Bank’s announcement last August that it would, through outright monetary transactions (OMT) in the secondary market, buy bonds issued by euro-zone countries that had run into difficulties and had agreed to subject themselves to the troika’s green-eyeshade brigade. Up until now there have been no OMT. The mere promise of the ECB’s largesse has been enough to restore the currency union to something as close to calm as this battered, utterly dysfunctional and grotesquely irresponsible creation can reasonably expect for now.
Germany’s central bank, the Bundesbank, has always opposed OMT. This is reflected in a leaked submission to the BVG, Germany’s Constitutional Court (effectively the country’s Supreme Court), which is related to a wider case (against the establishment of the euro zone’s permanent bailout fund) due to be heard in June.
If proceeding with OMT is found to be in breach of the German constitution, the euro zone will hurtle into a crisis that could easily dwarf the countless crises that have preceded it. Mats Persson of Open Europe, no alarmist, argues that such a judgment could “mean the end of the euro.” That’s right, I think, but, so is his observation that that is why the BVG will avoid pulling the trigger. For all its proud posturing, the court is still at heart the creature of the German political establishment, and it will not want to fire the torpedo that will sink the project to which that establishment has — nuttily — shackled its unfortunate country. The Bundesbank meanwhile can luxuriate in its position, it has made its objections known, and preserved (it thinks) its reputation. All that remains is the washing of hands, Pilate-style.
But two things to note. The first is this quote from the BuBa submission (picked up by the inevitable Ambrose Evans-Pritchard):
The document said OMT entails the purchase of “bad bonds”, violates ECB independence and entails a high risk of heavy losses in the “not unlikely” event that debtor states are forced out of EMU.
“Not unlikely,” eh? Does the tick-tock club have a following in Frankfurt?
And then there’s this. Whatever happens, there can be little doubt that the court will avoid ruling on such a politically toxic case until after the German elections in September. That’s smart politics, but for practical purposes (check out the comments by economist David Marsh — someone well worth following on this topic, incidentally — cited by Evans-Pritchard in his article) it means that the OMT is probably frozen for now. That’s not so helpful with Slovenia slouching towards something nasty, Cyprus still in a shambles, and mounting political discontent in Spain, Portugal, Italy (although there is now at least a government in Rome) and – watch this one very carefully – France.
Tick tock, as they say in Frankfurt (apparently).