The markets had me perplexed today with the DOW and S&P 500 down about a percentage point and a half each, and 10 and 5 year TIPS declining, I wondered what it was all about.
I found two stories that might explain at least some of it. The first story is about BoE chief Carney making remarks that the time for the BoE to start raising rates is getting closer. There are no direct quotes in the story, however. So one can never be sure what was actually said. Though, I don’t believe this was unexpected.
The second story is more interesting, about the European Court of Justice setting the hearing date on the legal challenge to the ECB’s Outright Monetary Transaction (OMT) plan to intervene in EZ sovereign debt markets in order to quell the debt crisis.
In February, the German constitutional court referred a challenge to the OMT plan filed by 35,000 plaintiffs to the European Court of Justice, siting lack of jurisdiction. The plaintiffs allege, among other things, that the OMT plan funds governments which is banned by the Maastricht and other amending treaties.
Curious about this claim, I decided to take a look at the “Economics and Monetary Policy” section which contains no such prohibition. But there are some other interesting items pointing to the prohibition of individual Member States interfering with the ECB.
If, as I pointed out some time ago, the Bundesbank did indeed sterilize the inflow of capital during the thick of the debt crisis; and indeed here we have the Germans interfering in the conduct of monetary policy of the ECB in pursuit of its primary objective of price stability of the European Community (that includes far more than Germany) trying to tie it up in court, we have what stacks up to be multiple violations of at least one EU treaty concerning monetary policy.
The answer the German constitutional court should have given, the correct answer, would have been to dismiss the case without prejudice – and have that be the end of it. Instead now, we have the EZ walking dead in a never ending crisis of debt and an EZ economy that is just a massive, slow motion implosion.
It is simply heartbreaking. It just doesn’t have to be this way… and according to section 109, it really doesn’t. The EU Commission can step in and put a stop to the madness.
I have pasted pertinent sections below:
- The primary objective of the ESCB [now ECB] shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a.
- The basic tasks to be carried out through the ESCB shall be:
– to define and implement the monetary policy of the Community;
– to conduct foreign exchange operations consistent with the provisions of Article 109;
– to hold and manage the official foreign reserves of the Member States;
– to promote the smooth operation of payment systems.
- The third indent of paragraph 2 shall be without prejudice to the holding and management by the governments of Member States of foreign exchange working balances.
When exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and the Statute of the ESCB, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.
Each Member State shall ensure, at the latest at the date of the establishment of the ESCB, that its national legislation including the statutes of its national central bank is compatible with this Treaty and the Statute of the ESCB.
- Within the limits and under the conditions adopted by the Council under the procedure laid down in Article 106(6), the ECB shall be entitled to impose fines or periodic penalty payments on undertakings for failure to comply with obligations under its regulations and decisions.
- By way of derogation from Article 228, the Council may, acting unanimously on a recommendation from the ECB or from the Commission, and after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability, after consulting the European Parliament, in accordance with the procedure in paragraph 3 for determining the arrangements, conclude formal agreements on an exchange rate system for the ECU in relation to non-Community currencies. The Council may, acting by a qualified majority on a recommendation from the ECB or from the Commission, and after consulting the ECB in an endeavour to reach a consensus consistent with the objective of price stability, adopt, adjust or abandon the central rates of the ECU within the exchange rate system. The President of the Council shall inform the European Parliament of the adoption, adjustment or abandonment of the ECU central rates.
- In the absence of an exchange rate system in relation to one or more non-Community currencies as referred to in paragraph 1, the Council, acting by a qualified majority either on a recommendation from the Commission and after consulting the ECB or on a recommendation from the ECB, may formulate general orientations for exchange rate policy in relation to these currencies. These general orientations shall be without prejudice to the primary objective of the ESCB to maintain price stability.
- By way of derogation from Article 228, where agreements concerning monetary or foreign exchange regime matters need to be negotiated by the Community with one or more States or international organizations, the Council, acting by a qualified majority on a recommendation from the Commission and after consulting the ECB, shall decide the arrangements for the negotiation and for the conclusion of such agreements. These arrangements shall ensure that the Community expresses a single position. The Commission shall be fully associated with the negotiations.
Agreements concluded in accordance with this paragraph shall be binding on the institutions of the Community, on the ECB and on Member States.
So there we have it folks.