The Italian head of the ECB, Mario Draghi, last week announced he would like to help certain countries in the south of Europe to borrow more cheaply. Subject to ‘strict conditions’, which were instantaneously refused by the Spanish prime minister, countries in Europe would now be able to ask for temporary access to liquidity by having the ECB print money for it via the ECB buy up short-term government bonds on the secondary market. Well, surprise, surprise.
Some key things to say about this that are not easily found in the Australian press:
- It is not clear this plan is legal. Right at the moment, there is a court-case in Karlsruhe where the German constitutional court is examining whether or not the European Stability Mechanism is actually within the rules or not. There is a good chance that it is not. Since the Draghi plan is supposedly going via the ESM, the plan might be dead on arrival. Even if the ESM is legal, you should expect the legality of this plan to also be questioned since it violates the European rule that the Central Bank cannot provide fiscal support to any country, which of course is precisely what it would be doing. You should expect complicated legal wrangling about mandates and the definition of ‘fiscal support’ to rage for months.
- The ECB’s decision to start printing more money has been expected for a while now. Back in December, I already said it was the road of least resistance given the intransigence of the rest of the European political system and many institutions have pushed this same line for much longer. Hence, even if the current plan turns out to be illegal, expect the ECB to print more money in some way or another.
- The number of nonsense plans floating around now in the EU is enormous, most of them completely unworkable. The European Commission for instance wanted the ECB to start regulating all the banks in problem countries. As the German finance minister pointed out, the ECB doesn’t have the capacity to do this even if it wanted to. Indeed, it doesn’t have the capacity to even properly monitor a single large bank and Europe would need a new institution to do even that. So forget about that one, although you should note that it is the European Commission that spouts this nonsense which tells you about their limited understanding of the situation. One of the mistakes many observers make is to presume that the European leaders know what they are doing, whilst for most of them anything to do with finance is magic. Other hot air is all the talk of ‘forcing’ countries out of the Euro. This is complete hot air since there is no legal mechanism to do so and countries will only leave the Euro if they decide themselves to do it.