EUROINTELLIGENCE DAILY BRIEFING, 13 de Setembro de 2012

Eurosceptics take heart from Constitional Court’s threat against the ECB

  • The German constitutional court yesterday delivered another of its Yes But verdicts;
  • German president Joachim Gauck is now free to sign the ESM and the fiscal pact into law;
  • the court set two conditions, which are mostly fulfilled already: sufficient degree of parliament control, and a capping of Germany’s maximal losses to €190bn;
  • eurosceptics welcome the court’s criticism of the ECB’s bond purchases, and the announcement that it would fully deal with this issue in the main verdict;
  •  said bond purchases with the intent to fund governments away from the capital markets are unconstitutional;
  • Heribert Prantl says the German constitutional court got lost in the complexity of the eurozone crisis and has given up its fight against European integration;
  • Wolfgang Munchau writes that the court, and German constitutional law in general, have lost their awe inspiring relevance in the eurozone crisis;
  • Reinhard Muller hopes the court will take a firm stance against the ECB;
  • Joachim Jahn says the German government might end up dragging the ECB in front of the ECJ if the court declares ECB bond purchases unconstitutional;
  • Mark Schieritz says the ECJ would side with the ECB, but the real damage is political;
  • Mark Rutte wins a surprising clear victory in the Netherlands;
  • his liberal VVD and the labour party PvdA together have enough seats for a small majority;
  • tensions in the Greek coalition are increasing as the Democratic left bluntly rejects the troika’s recommendations;
  • Greece is facing another general strike this month;
  • Michael Noonan plays down hopes of debt relief talks next month;
  • Jose Manuel Barroso proposes a federation of nation states, and a new treaty;
  • the Spanish press criticises Mariano Rajoy’s evident duplicity on whether or not to seek a bailout;
  • Martin Schulz criticises Rajoy’s tactics;
  • Luis de Guindos says Spain cannot maintain the welfare states unless the economic situation improves;
  • Vittorio Grilli says the ECB and the German constitutional court had ensure that Italy is now save;
  • Mario Monti reiterates again that he won’t seek another mandate;
  • Fiat, meanwhile, says the Italian auto market is dreadful.

The big accidents that could have happened this week did not happen. the German constitutional court produced a surprisingly meek verdict, and Mark Rutte won the Dutch elections.

When the court ruled on the EFSF a year ago, it also rejected the plaintiff’s case, but said at the time that such structures should not be permanent, and must be under strict parliamentary control. This time, it allowed the permanent mechanism, but pushed the can down the road again when it said that ECB bond purchases might be unconstitutional. Just as the eurosceptics took heart from the EFSF-verdict, their hope now rests on the court’s future condemnation of bond purchases. But the court also made clear that the decisive criteria is the intent of the bond purchases. They are only illegal if the intent is to fund government deficits outside the capital markets, which is clearly not the stated intent of the OMT.

In rejecting the plaintiff’s case and allowing President Joachim Gauck to sign the ESM and fiscal pact into law, the court set two conditions – which are already either fulfilled, or mostly fulfilled. The first is that the Bundestag, or rather its budget committee, must oversee the entire process. The second is that Germany’s total maximum liability of €190bn must not be exceeded, that any increase would require another Bundestag vote. This is not a very onerous condition, since the Bundestag already has wide-ranging powers – and is already running into capacity constraints – and since the official risk is capped. The biggest financial risk, however, is not the official risks, but the indirect risks – Target 2, bank recaps in Germany if the euro collapse, wider economic consequences – which are insurable and uncappable.

Heribert Prantl of Suddeutsche Zeitung said that the court has effectively given up. The court will not block any further European integration, and has effectively retreated from its erstwhile nationalistic overconfidence. The court still deserves respect, but not in EU related matters. Prantl says that national democracies still have the right to reject and veto, but not the right to create EU policies. That is partly the court’s fault, as it persistently failed to encourage more EU-level democracy through its repeated insistence that the European Parliament is not a proper parliament because of its unporportional voting weights.

In his column in Spiegel Online, Wolfgang Munchau compares the eurosceptics with the man in a Kafka’s parable “Before the Law” – a man who is encouraged to gain entry to the legal system, but is ultimately denied by the doorman. He said the court had effectively revised its entire body of EU rulings, giving a much greater leeway and room for manouevre to elected politicians. Munchau said he welcomed the court’s change of position, and concludes that the court is essentially no longer an important force in the further development of the eurozone crisis.

The eurosceptics over at Frankfurter Allgemeine extract some hope from the court’s comment on the ECB. In its main analysis, Reinhard Muller writes that the court effectively declared the OMT illegal (which we think is not true), by stipulating that bond purchases are unconstitutional if the goal is to fund governments independently of the financial markets. The main conclusion of this part of the article is that the court has effectively closed the floodgates on ECB monetary financing of government did. The issue will be dealt more formally in the main hearing on the ESM after yesterday’s provisional hearing. The court also established an important principle – that despite their independence, central banks are subject to the law. (That is hardly a new principle. The concept of independence was always limited: it was independence from government, and it was never institutional independence, only independence in monetary policy. Central banks are, of course, subject to laws and answer to courts.)

In a further commentary in Frankfurter Allgemeine, Joachim Jahn is going on a scenario rampage as he works through what would happen if the court ends declaring the OMT as unconstitutional. The court has no jurisdiction over the ECB. Such a decision would force the government to an empty chair policy both in the ECB and in the EU in general, and might force the government to sue the ECB at the ECJ.

In his comment, Mark Schieritz also looks at the dynamics of the court’s possible interference with ECB policy. Like Jahn he concludes that the government may end up suing the ECB in the ECJ, but the important issue is not legal but political. The ECJ is likely to be on the side of the ECB. But can the ECB really pursue the OMT if Germany’s highest court considers it unconstitutional?

(The ECB undoubtedly will completely disregard the German constitutional court, and rightly so. The politics is another matter. We, too, agree with Schieritz that Germany will ultimately stop short of what it takes to save the euro for political reasons, and the court may well contribute to that political process in future ruling. But the legal aspects are no longer relevant.)

Pro-euro centrist parties win majority in Dutch elections, anti-Europe parties loses

Dutch voters overwhelmingly backed pro-European parties on Wednesday, electing centrist parties committed to austerity and rejecting Geert Wilders  anti-EU party.   With 96% of the votes counted, Rutte’s centre-right Liberals won 41 seats in the 150-member lower house, a slender two-seat lead over the centre-left Labour Party on 39 seats,  based on results early on Thursday morning, Reuters reports. The results are far exceeding pre-poll predictions. That means that if the two main parties agreed an alliance, the VVD and Labour would have 80 seats, a thin majority in the 150-seat parliament. The more hard-left Socialist Party was set to win 16 seats and Wilders’ anti-EU PVV just 15 seats, a sharp drop from its previous tally of 24, according to AFP.

No Greek coalition agreement on layoffs

With international lenders turning the screws on Greece – including reportedly extending working hours to 78 hours a week and raising the retirement age to 67 – Prime Minister Antonis Samaras was so far unable to convince his reluctant coalition partners, PASOK Socialist leader Evangelos Venizelos and Democratic Left chief Fotis Kouvelis to accept some of the measures, including the lay off and eventual firing of up to 35,000 public workers over the next three years, writes Greek Reporter.  Following a meeting with Samaras, the leader of Democratic Left, Fotis Kouvelis, was the staunchest in his opposition:  “No measures can be imposed on a society that is disintegrating,” Kouvelis said. As for the proposed labour market reforms, Kouvelis said there was “no way” the government should accept the demands of the troika, Kathimerini  quotes. Venizelos was more upbeat on the prospects for a deal. “There is small progress every day,” he said. “My experience tells me that we will reach a comprehensive agreement.”

A wave of strikes has already hit Greece, with doctors, teachers, judges, uniformed officers, and other workers walking off the job for various periods this week and the country’s two largest labour unions, representing both public and private workers, is gearing up for a massive general strike sometime this month.

Noonan: No rush in debt relief talks

The prospect of Ireland securing a deal in October on banking debt relief was played down by finance minister Michael Noonan who said it was in Dublin’s interests not to rush agreement, the Irish Times reports. Rather than rush to meet the late October deadline set by EU economics commissioner Olli Rehn,  Noonan suggested Ireland could get better terms on easing its multibillion debt by waiting until Spain secured assistance for its banks. “It is an open secret that the Irish position and the ECB position aren’t totally aligned, but technical work continues,” said Noonan. Asked whether it was important to have an accord in place before the budget in early December, Noonan said: “Obviously there are issues that would come across the organisation of the budget. It’s something that we would like, but it’s not vital. It doesn’t really change the budget arithmetic.”

Jose Manuel Barroso has discovered Europe

Speaking in front of the European Parliament Jose Manuel Barroso has come out in favour of a federation of nation states with shared sovereignty and a new European treaty. After seven mostly lacklustre years, he is getting ambitious. The FT writes that his call for a new treaty came as a surprise. Merkel has said she wanted one, and we conclude that a consensus may now be slowly building up for a new IGC to pave the way for a fiscal union.

Rajoy caught contradicting himself on rescue

Wednesday was the first weekly “Government control session” in the Spanish Parliament after the Summer break, during which Rajoy said he wasn’t sure Spain would need ECB support in the bond markets. However, as reported in yesterday’s briefing, at the same time two Finnish newspapers were publishing interviews given around Tuesday’s visit by Finnish PM Katainen in which Rajoy had admitted Spain was likely to ask for a credit line to activate ECB bond purchases without additional conditions. Unfortunately for Rajoy, the self-contradiction didn’t go unnoticed to El Mundo, which headlined “Rajoy doubts a rescue in Congress and takes it for granted in the Finnish press”.

In comments to Huffington Post (Spain edition), European Parliament president Martin Schulz criticized Rajoy’s lack of definition on a possible rescue, saying “let’s wait a bit to see if he clarifies his message”. Schulz denounced the hypocrisy of heads of government who tell their citizens they will not accept outside conditions and at the same time approve the treaties setting out those very conditions.

Luis de Guindos: welfare state is at risk

Europa Press quotes extensively from an intense exchange during Wednesday’s “government control session” in the Spanish parliament. Economist and IU (United Left) MP Alberto Garzon challenged the handling of the crisis by Economy minister Luis de Guindos, who replied that “if in the next quarters the situation of the last five years is not reversed it will be impossible to maintain social services” and that the government’s goal is neither the risk premium nor rescuing the banks but “getting the economy back to growth and generating employment”. He also defended the need to rescue the financial system by appealing to the Great Depression when, he said, allowing the financial system to collapse “gave rise to extremist movements which let to WWII”.

On Tuesday, however, de Guindos had boasted that Spain is one of the few countries in the EU with a trade surplus. He made his comments at a meeting with Latin American economy ministers in Madrid in preparation for a summit to be held in November, as reported by ABC.

Italy is now saved, Grilli says

Italy won’t ask for ECB intervention, Italian Economy Minister Vittorio Grilli told the Wall Street Journal. Italy now has a less expensive access to bond markets. “We don’t think it’s necessary, or desirable, to seek a program”, Grilli said. With the ECB decision on OMT that will provide unlimited bond-buying after strict conditions, and ESM approval by German Constitutional Court, the eurozone seems to have enough power to ringfence Italy and Spain. Grilli reiterated that Italy was on a trajectory to a balanced budget. Like Mario Monti, Grilli also remarks Italy’s reforms are aimed for the long run, and that financial markets should give Rome more time.

Monti says again that his job will end in 2013

Mario Monti reiterated his plans to leave office at the end of his mandate, La Stampa reports. Despite the rumors, Monti said no to a second mandate. He said ominously that he had yet to reflect on the future, but his job would definitely end with the spring elections, he said in an interview with the Washington Post. In the last days, several influential people have called for a new mandate for Monti. The efforts of Italy in put in place a package of structural reforms could derail after the 2013 elections. Monti said that he was worried about Italy’s future post 2013. According to Treasury forecasts, the reform of the labour markets, the pension system and the public administration will help Italy run a primary surplus of 1.8% of GDP in 2012.

Fiat confirms poor auto sales in 2012

We don’t usually report industrial news, but Fiat’s sales and profit expectations are an important bellwether of the Italian economy. Fiat expects overall results to improve in 2012, largely due to Chrysler sales in North America, president John Elkann said. In an interview with Italian weekly Panorama, he said the “Italian (auto) market is back down to levels last seen 40 years ago.” Fiat reported a slump in sales on the European market of 20% in August and July. The automotive output was down 18.7% in July compared to the same month in 2011. It’s the biggest drop since 1994, according to Italian Statistical Agency ISTAT. For a comparison, the ISTAT data shows that the industrial output in recession-hit Italy registered another drop in July when it fell 0.2% compared to June and by 7.3% versus the same month in 2011.

10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

The euro is approaching $1.30

 
10-year spreads
Previous day Yesterday This Morning
France 0.662 0.620 0.631
Italy 3.572 3.528 3.520
Spain 4.199 4.064 4.112
Portugal 6.822 6.631 6.778
Greece 20.114 19.246 -1.60
Ireland 4.140 3.832 4.057
Belgium 1.081 0.992 0.999
Bund Yield 1.511 1.588 1.596
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.289 1.2922
Yen 100.260 100.41
Pound 0.799 0.8021
Swiss Franc 1.208 1.2099
ZC Inflation Swaps
previous last close
1 yr 1.99 2
2 yr 1.77 1.78
5 yr 1.9 1.91
10 yr 2.18 2.19
Euribor-OIS Spread
previous last close
1 Week -7.643 -8.643
1 Month -3.643 -4.643
3 Months 6.357 5.857
1 Year 61.843 61.043
Source: Reuters

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