09.13.2012 0

Why the German court decision changes nothing

Euro Ticking Time Bomb

Adapted from: http://www.sanroc.com.my

By Robert Romano — A much-anticipated constitutional court decision in Germany has cleared the way for the €500 billion European Stability Mechanism (ESM) —  the bailout of bankrupt governments in Portugal, Greece, and Ireland that cannot or will not get their fiscal houses in order.

While investors temporarily cheered the news, remarkably missing from most analyses was how little the ruling actually changes on the ground.

If anything, the German court ruling makes abundantly clear the impediments of utilizing ESM to bail out the much larger problems in Europe: Italy and Spain. Those two countries have combined debts of more than €2.6 trillion and rising, according to data compiled by Eurostat — far in excess of anything ESM could ever afford to guarantee without expanding.

The court decision also makes clear that parliamentary approval will be needed at the national level of member states in order for the bailout program to be expanded.  It also makes clear that the ESM cannot borrow additional funds from the European Central Bank (ECB).

So if either Italy or Spain comes in the door looking for additional support or if the bailout fund becomes maxed out, another round of legislative approvals across Europe will be required to expand it.

It’s one thing for core European nations like Germany or France to guarantee Greek (€335.6 billion), Irish (€169.2 billion), or Portuguese (€184.2 billion) debt. Those are peripheral nations. It is quite another to guarantee a core nation like Italy (€1.89 trillion) or a not-so-peripheral government like Spain (€734.9 billion).

Of course, that won’t stop the ESM from trying should Spain or Italy ever accept the terms of the bailout arrangements.

That is because the court ruling also clears the way for the ESM through its board of governors to make unlimited commitments to debtor nations prior to approval by national parliaments. Americans for Limited Government President Bill Wilson blasted that part of the ruling, saying that “the final shred of innocence that the rule of law applies has been stripped away.”

Wilson explained, “The ESM as drafted allows the board of governors to arbitrarily increase the amount of money each country must pledge for bailouts without any legislative approval. This was blatantly unconstitutional.”

Instead, when the ESM hits its lending limit and makes larger commitments to debtor nations, legislatures will be forced under duress to rubber-stamp them.

In this manner, a promised guarantee to Italy or Spain will be used as leverage against elected representatives in member states, who will perpetually be threatened with a system-wide collapse should a bailout not be approved. Such brinksmanship can hardly be considered a standard feature of a stable democracy.

“The law and the consent of the governed are no longer the masters in Europe. Now it is the whims of central banks and compliant politicians who are merely the hired help,” Wilson contended.

In the meantime, it remains to be seen if ESM will even be used by Italy or Spain. Spanish Prime Minister Mariano Rajoy is not interested in the firm bailout conditions that Greece and others have been subjected to. All he is interested in is free refinancing from the ECB.

“In addition to growth, the only option I am considering is using the central bank’s announced mechanism,” Rajoy said to a Finnish newspaper, adding, “It is completely outruled that we would ask for a bailout for the whole country.”

The only problem for Spain is that the ECB has explicitly outlined the conditions for any further bond purchases, which includes sovereigns applying to the ESM. In other words, the option Rajoy wants, ECB bond purchases but no ESM participation, is not an option.

Which leaves the entire situation largely where we started. Countries like Spain or Italy do not want to cede their fiscal sovereignty to a faceless board of eurocrats. And nations already on the dole, especially Greece, become more likely to leave the eurozone every day they cannot restore economic growth or reduce their high levels of unemployment.

Finally, even if Spain or Italy do come in for more bailouts to save their creditors, should the fund be maxed it out, it becomes less likely it will again be expanded by core countries like Germany as political support for the bailouts wanes.

So, no matter how large the bailout fund is, the whole situation could come flying apart at any moment when one of the debtor countries decides it would simply be easier and less costly to simply default, or if Germany or other ESM members decide they’ve tired of propping up their neighbors.

Either way, the euro is running out of time.

Robert Romano is the Senior Editor of Americans for Limited Government.

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