German president says ECB bond purchases illegal
The German presidency is a largely ceremonial office, but he has two functions that can be important in the euro crisis. His words carry weight, and influence public opinion. And he constitutes an important link between the parliament, who legislation he has to approve, and the Constitutional Court. Yesterday, Christian Wulff said he considered the ECB’s bond purchases as legally questionable. The direct purchase of bonds was explicitly ruled out. It is wrong to circumvent this rule through secondary market purchases, according to Frankfurter Allgemeine. He also criticised the EU governments’ tendency to kowtow to financial markets. In free democracies, decisions have to be taken by parliaments, and said the rescue policies were too hectic. He warned of a domino effect of rescue packages, asking rhetorically, who was going to rescue the rescuers? The paper also reports that the German government is likely to secure its own majority for the vote on the EFSF, scheduled next month. Angela Merkel has proposed that the stability and growth pact should be monitored by the European Court of Justice, which could declare offending national budgets as null and void. (Since this also applied to Germany, would this not contradict the German constitution, which insists on full budgetary sovereignty?)
In an approving comment, Holger Steltzner writes in the same paper that it is unprecedented for the two of the highest representatives of the state – President Wulff, and the Bundestag’s president Norbert Lammert – to criticise the government over its handling of the rescue packages. They both enjoy large public support. And they are both right. Steltzner is furious about Schäuble’s plan to circumvent the German parliament in the EFSF legislation, which gives the parliament effectively no control over the EFSF’s activity. Lammert has demanded significant changes to the legislation, including a veto right over each EFSF programme.
Helmut Kohl attacks Merkel’s lack of leadership He can hardly speak after his stroke last year, but when he speaks, he mostly attacks Angela Merkel. Frankfurter Allgemeine reported that Kohl attacked her lack of principles. “The enormous changes in the world cannot be an excuse not to have a point of view or an idea where you belong, and where you want to go to,” he told the paper “Internationale Politik”. If he had still been chancellor, he would have vetoed the Greek membership of the euro and Germany’s breach of the stability pact (we doubt the former, but agree with the latter statement). Since those mistakes have now been made, the EU needed a forward-looking policy, devoid of ideology.
What is the legal position on Eurobonds? They are hard to square with German constitutional law.
The German constitutional court will almost certainly accept the EFSF (in our view), but how about Eurobonds? On this question, the consensus among constitutional lawyers in Germany is that they contravene fundamental aspects of constitutional law. (but notice there are also dissenting voices as well.) Frankfurter Allgemeine has an extensive analysis on the subject. Under Art. 110 of the German constitution, the Bundestag enjoys full fiscal sovereignty, and this right was reaffirmed by the Constitutional Court as an essential parliamentary control of the executive. While the court accepts a partial transfer of decisions to the level of the EU, the parliament must retain a minimum set of rights to ensure democratic decision making. In the Lisbon ruling, the court gave an explicit definition of what that would entail. The paper quotes two constitutional lawyer who agree that Eurobonds constitute a fundamental breach of this principle. The basic disagreement seems to be whether this breach already occurred at the start of the monetary union itself, or at the moment when Eurobonds are introduced. The paper adds that the extension of the EFSF to include bond purchases and other functions was almost certainly not consistent with German constitutional law.
France saving efforts relies heavily on taxes Francois Fillon unveiled yesterday evening a series of additional measures, a potpourri of diverse measures to save €1bn this year and €11bn in 2012, Les Echos reports. The measures include taxing sugary soft drinks, alcohol and tabac, higher threshold for social charges, higher charges on complementary health insurances and reduced tax allowances for professionals. The catalogue of measures is long with an emphasis on taxes; expenditure cuts are limited to €500m this year and €1bn next year. Fillon says 83% of the effort comes from the wealthy, large enterprises and high-income households. The FT lists those measures which include a temporary 3%tax on all incomes above €500,000, increased social charges on capital income,and a tax on gains on property investments, excluding primary residences, to bring in a considerable €2.2bn in extra revenue next year.
Fillon also announced to rein in the benefits for companies of tax-free overtime and plans to limit the tax breaks given to companies incurring losses, bringing €1,5bn in 2012, and a step towards harmonising French and German corporate tax systems. Nicolas Sarkozy and Angela Merkel have made this a key element of their proposals for greater European integration.
The growth forecast was revised downwards, to 1.75% (instead of 2%) in 2011 and 1.75% (instead of 2.25%) in 2012.
Irish government seeks €10bn additional cutbacks from ministries Ministers have been ordered to identify potential spending cuts worth €10.5bn from their departmental budgets, including reductions in staff numbers and social welfare, the Irish Independent reports. The instructions are to find savings worth 15% to 20% of spending, or €1 in every €5 spent. The revelation comes as Public Expenditure and Reform Minister Brendan Howlin publicly admitted some of his colleagues were not pulling their weight in coming up with cuts.
Report reveals poor performance of Greek tax offices The performance of Greek tax offices is becoming a problem, as Finance Ministry data made public on Wednesday showed that tax inspectors are doing a particularly poor job to follow up on tax evasion, Kathimerini reports. Official figures for June revealed that out of the country’s 34 major tax offices, 12 had not performed a single audit on taxpayers, while 31 clocked an average of less than one check per employee. This year the country’s 288 tax offices had only inspected 152,822 cases, with another 358,503 cases still pending. This means that the authorities have only checked three out of every 10 cases in their hands. The data also showed that there are several tax offices with over 10% of registered taxpayers not paying their dues, most of them major companies.
Greek finance minister says stability fund can purchase equity in banks Reuters reports from Athens that the stability fund to recapitalise Greek banks can inject capital into Greek banks through purchasing equity. If the banks’ core tier 1 ratio falls below 10%, and if they cannot raise capital in the market, they will have to turn to the €10bn stability fund. As an owner of common voting shares, the fund will have the right to force banks to restructure.
Bundesbank plays down fears of a funding crunch The Bundesbank said yesterday that the reduction in liquidity through US money market funds was not as serious as reported, and that European banks were not facing a post-Lehman style funding crunch, Reuters reports. “First, liquidity needs can be covered by a number of other means including secured funding with repos. Second, if need be, the ECB stands ready to mitigate potential bottlenecks, based on the swap agreement in place with the Fed.” He also said German and other European banks had already secured much of their 2011 funding .
Germany eyes tax cuts as economy slows down The Ifo business confidence index registerd the sharpest fall since 2008, dropping by a more than expecting rate from 112.9 in July to 108.7 in August, according to the Financial Times. The index is still at a very high absolute level, but it is clear that it has gone past its peak and is now heading downwards (though it is a some way from a level that would signal a recession threat). Reuters, meanwhile, reports that a planned reform to Germany’s tax system will save taxpayers €6bn, quoting the head of the CDU’s parliamentary party Volker Kauder. Most of these changes will come through an increase in tax thresholds. The savings are minute in terms of GDP (some 0.2-0.3%), and will not affect the trajectory towards a balanced budget by 2014. Missing the moment Ines Zoettl, in a comment in Financial Times Deutschland, writes that countries have the governments they deserve, and that Merkel’s narrow bourgeois mindset was indicative of the state of the country. The French never miss a moment of grand-standing. “What about the Germans? They are German. They pay reluctantly for the euro, but they miss the grand occasion. Instead, they divide the grand gesture into 100 gram parcels, and no, they say, this is all there is. They distribute billions this way, and spend much time checking whether the decimals have been calculated correctly.”
Brtitain should join Eurobonds We almost fell off our chair this morning, when we read this comment from Chris Giles in the FT, urging the British to issue a half of their new debt in future Eurobonds, in return for some political leverage over the eurozone. Giles writes that Eurobonds would offer investors a hedge against a devaluation of sterling, and this would indirectly also benefit the gilt market. (This is something we never considered. But should eurozone bonds arrive, they would do so via an institutional framework, such as the one proposed by Romano Prodi, and it is not likely that non-eurozone member states would be part of it. They might find the burden to onerous. In other words, it would not really make an awful lot of sense to be part of the eurozone bond, but not part of the euro itself.)
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