Most of the mainstream UK media came out with phrases suggesting that the European Court of Justice’s decision to approve ‘OMT’ yesterday was ‘removing a potential obstacle to the launch of a euro area quantitative easing scheme’. That’s sort of true – but the main obstacles remain exactly where they were: Jens Weidemann, The Bundesbank, and the Karlsruhe Court. Under the German constitution, Karlsruhe recognises no superior Court. And in Realityland, Bankfurt simply is not going to allow Berlin to put Germans on the line for eurozone bankruptcy.
Those who want QE or OMT (the ECJ itself insisted that Draghi must “…give a proper account of the reasons for adopting the OMT programme, identifying clearly and precisely the extraordinary circumstances that justify the measure..”) are nevertheless frighteningly confused about what it is, might be, or should be about. The European Court mustn’t hold its breath hoping that the ECB will take a blind bit of notice of its ‘restrictions’: Supermario will simply do what he wants
I wouldn’t mind, but all the legal niceties amount to nothing when you consider that the easing purchases strategy has no record of success anywhere: not in the UK, US, Japan, China – or in the eurozone to date. Draghi insists that without the first push of OMT, the euro would be dead, but we’ll never know that because (a) it’s still alive, (b) it’s in a state close to death anyway and (c) he is NOT proposing OMT this time: he wants full-on QE.
Hardly anyone seems to have spotted this. To perhaps over-simplify, the OMT approach is really about the temporary propping up of short-term (< 3 years) sovereign bonds. OMT – and lots of other under-the-table stuff – was used to despike ClubMed short term bonds by buying such junk, and thus effectively putting off fiscal Domesday.
It was a quick fix, but it wasn’t followed by the much-heralded recovery ha-ha….and so now the ECB boss wants to buy anything and everything that might create a default…be it bank or Sovereign. The line from the Brussels Bunker will be one of ‘stimulating via OMT’, but in reality it will be a QE blitz chucking everything at the large hole in the Good Ship Lollipop.
It won’t happen on that scale, and it won’t work. That’s because (forgetting the track record for a minute) first, things have moved on: Greece is flatlining, and Italy is drowning; and second, the Germans just aren’t going to chuck good money at bad. The final straw for Berlin – which continues with its fantasy that Greece is no longer a problem for the euro – will be if Alexis Tsipras wins the snap election there. With just nine days to go, and despite Samaras the Scary working overtime, Syriza has a steady lead of between three and four per cent.
Draghi has said he will withdraw €30 billion of finance even if it tips Greece into default. This threat worked with Cyprus and Ireland: with a radically different elite in Athens after January25th, it may prove an empty threat.
In Italy, meanwhile, President Napolitano has resigned and that too necessitates an Assembly-based election. The Italian constitution isn’t quite as hard and fast on this subject as the Greek one, but failure to elect a president would probably force a new election, and perhaps even a change of leadership in the ruling Democratic Party. At very best, the resignation is a distraction that Prime Minister Renzi doesn’t need.
At the moment, polls suggest that Italy is somewhat more anti-euro than Greece, and the two most virulent Parties in that regard hold 30% of the seats in Parliament. Rather more pressing is the fact that Italy’s debt is in excess of 132% of GDP, output is at best stagnant, and the deficit is very close to the 3% threshold Brussels allows. Renzi has no room for flexibility there. In Berlin, rumours continue that a dedicated team is fully employed in planning a withdrawal from the eurozone, should Italy prove impossible to tame.
For myself, I have been reliably informed for some fifteen months now that both debt and deficit are being massaged downwards by Italian leaders. The government has form in that area, and having visited the country four times in that period, my impression remains that the People have given up at all but the most senior levels.
The French deficit is even worse, being forecast to be 4.7% during 2015 after hitting 4.3% last year. A desperate decision in Brussels to give the Hollande administration ‘more time’ to balance the books is nothing more than spin: we are halfway through January now, and the President is in no position at all to introduce draconian cuts rapidly: quite the contrary, Francois Hollande is overseeing an expansive fiscal policy.
But as the debt-rot spreads across the continent, this is where things start to get silly: all QE aiming to buy eurozone sovereign debt would have to be shared out according to each State’s share of ECB capital. The Germans would cough up the lion’s share – but France would also have to chip in bigtime. So once again, the crazy spectre looms of a highly indebted eurozone member becoming even more indebted to try and reduce its own debt.
The bottom line is this: one ECJ decision isn’t going to change the practicalities and history of the situation. These dictate that QE isn’t going to work, and as this becomes insanely obvious Berlin/Frankfurt isn’t going to sit there and watch Götterdämmerung come hurtling towards it.
The eurozone as we know it is doomed, period.