Some issues become tedious to discuss but importance is not diminished by the tedium. While the issue of OMT is extremely important for global financial markets, its significance is understated in the U.S.-centric financial press. The European press had two important pieces on the issue of the ECB and possible violation of German law. First, the Telegraph had a piece by Ambrose Evans-Pritchard, “Germany’s Brother Gladiators Battle Over Euro Destiny in Constitutional Court.” The title of the article reveals the importance of the issue as it will draw lines in Germany behind the two key issues represented by ECB Vice Chairman Jorg Asmussen and ECB Executive Board Member and Bundesbank President Jens Weidmann. The Weidmann argument is that the OMT PROGRAM “blurs the line between fiscal and monetary policy.” It is not the mandate of the ECB to bail out insolvent states. The argument for the Asmussen group is that the OMT program saved the breakup of the EU and safeguarded the monetary union. But that of course raises the question of what institution provides the financial backstop for safeguarding the EU?
The ECB has no taxing authority and thus can only provide credit in the name of some money-raising authority. There is no central taxing body in the EU as all fiscal policy is set by each individual nation for to surrender fiscal policy would be an act of relinquishing sovereign authority. It has been the French that has most opposed a harmonized fiscal authority, fearing dominance by a regime of budgetary austerity overseen by the tight-fisted Germans. The French stance has been to oppose a more federalized Europe. Evans-Pritchard notes that the Chief Justice of the GCC maintained that it is not the success of the OMT program that will be determinate “…otherwise the end would justify the means–such an idea would go against the central tenets of a democratic state grounded in constitutional law.” The court will have to decide whether or not the ECB’s categorical imperative is to maintain the EURO regardless of its legal authority.
Secondly, the theme is further detailed in an FT article by Michael Steen, “Germans Clash over Rescue Plan For Euro.” The article cites an argument made by Jorg Asmussen that any nation partaking in the OMT program would have to sign onto an agreement about reforming and restructuring their economy. This is the real sticking point to the entire OMT program put forth by Draghi, which was based on severe conditionalities in order to placate the Bundesbank and its President, Weidmann. The conditions that would have to be met would create great hardships for any adherent, which is why nobody has availed themselves of OMT funds … NOBODY.The medicine would kill the emergency room patient. This is why the argument presented by Mr. Asmussen is a straw man.
***Quick Hitter: Tonight the Reserve Bank of New Zealand (RBNZ) announced its interest rate policy and it held the overnight rate steady at 2.5%. In a bout of double-talk, Governor Graeme Wheeler noted that the New Zealand economy was performing well and housing construction was robust due to the ongoing reconstruction in Christchurch from the earthquake. Inflation was under control, but the KIWI was still too strong and was causing problems for NZ exporters. I, like Harry Truman, am still searching for a one-armed economist so we could dispense with, ON THE OTHER HAND.