European Court rules that ECB’s OMT program of 2012 is OK; not a word from Germany about returning the Greek 2010 courtesy

European Parliament. Last Monday 15 June Economic and Monetary Affairs Committee MEPs met ECB President Mario Draghi and debated the ongoing Quantitative Easing program and sovereign bond purchases, among other things. Members also discussed the state of play in talks between Greece and its international creditors. Roberto Gualtieri, President of ECON Committee (on the left) gazes at Mario Draghi answering a MEP’s question. (EU Parliament Audiovisual Services, Brussels, 15/6/2015, © European Union 2015 - EP).

European Parliament. Last Monday 15 June Economic and Monetary Affairs Committee MEPs met ECB President Mario Draghi and debated the ongoing Quantitative Easing program and sovereign bond purchases, among other things. Members also discussed the state of play in talks between Greece and its international creditors. Roberto Gualtieri, President of ECON Committee (on the left) gazes at Mario Draghi answering a MEP’s question. (EU Parliament Audiovisual Services, Brussels, 15/6/2015, © European Union 2015 – EP).

Last Tuesday 16 June the European Court of Justice issued a historic decision ruling that Mario Draghi was legally correct when on 26 July 2012 speaking at the Global Investment Conference in London said the famous phrase, “…the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. Some weeks later, on 6 September 2012, Draghi fulfilling this promise announced the Outright Monetary Transactions (OMT), the program which authorized the European System of Central Banks (ESCB) to purchase (on the secondary markets) government bonds issued by member states of the euro area. This happened in order to save the European sovereign debt market from a breakdown.

Several groups of individuals in Germany questioned the constitutional base of the OMT program and took their action to the Bundesverfassungsgericht (Federal Constitutional Court, Germany). The parties which brought these actions maintained that the OMT (a) is not covered by the mandate of the European Central Bank and contravenes the prohibition of monetary financing of the euro area Member States and (b) that those decisions breach the principle of democracy entrenched in the German Basic Law (Grundgesetz) and thus impair German constitutional identity.

ECB was right in 2012

In its turn, the Bundesverfassungsgericht decided that it had to ask the European Court of Justice whether the EU Treaties permit the ESCB to adopt a program such as the OMT. In particular, it had doubts as to whether the program is within the powers of the ESCB, as defined by the EU Treaties, and is also uncertain about whether the program is compatible with the prohibition of monetary financing of the Member States.

With last Tuesday’s judgment, the European Court replied that the EU Treaties permit the ESCB to adopt a program such as the OMT. Understandably, this decision will be soon handed on to the German constitutional court biding it to deliver a similar judgment. In this way the German objections against ECB’s extraordinary monetary tools will be definitely settled.

The new quantitative easing

Now, let’s discuss the new quantitative easing program of the ECB of a total value of €1.14 trillion. Despite the grievances from the German Federal ministry of Finance and the country’s central bank, the Bundesbank, there was no similar legal action in Germany against the new ECB quantitative easing plan, the so-called “expanded asset purchase program”.

This new project was announced last January and includes bonds issued by euro area central governments, agencies and European institutions. It commenced on Monday 9 March and provides for a total expenditure of €1.14 trillion, effectuated in monthly installments of at least €60 billion each and is expected to span until September 2016. Its prime target is to fight deflation and stagnation in Eurozone.

All that started with the crisis

However, all those unconventional monetary tools began when the financial crisis landed on European soil, after the outburst of the US financial meltdown in the aftermath of the Lehman Brothers bankruptcy of September 2008. The first EU financial sector to be touched by this modern-day economic Armageddon was the entire European banking system, which was at the time seriously undercapitalized and overexposed to American toxic assets.

A number of EU banks started to go bust with the first one being the UK’s Northern Rock. The disease spread to mainland Europe and hit a large number of big banks. Germany, France, Belgium, Holland, Austria and many more Eurozone countries were obliged to spend trillions of euros to support their ailing banking system. The EU Commission estimates the total amount of public money spent to support the Eurozone banks at €4.5 trillion.

Then Greece came

Unfortunately, in the middle of Europe’s efforts to salvage its failing banking system and the world from complete chaos, towards the end of 2009 it became apparent that Greece, if left alone, was heading for bankruptcy. Her banks had no problem whatsoever. It was the government that had come at the edge of insolvency. At that point the ECB intervened decisively. But was it done in a just and fair manner? The answer is clearly ‘no’. Let’s recall the facts.

On 10 May 2010 the support mechanism for Greece was enacted. It contained the European Union, the International Monetary Fund and the ECB. On the same day though the ECB almost silently introduced its own ‘private’ salvation program (Securities Market Program) to support the Eurozone banks, mainly the “too big to fail” French and German lenders.

Under this ‘monetary’ tool the ECB was buying the Greek sovereign bonds from the German and French banks which were exposed to toxic Greek assets. Now talking about prices, in reality at that time there was no buyer for Greek securities at the exception of ECB. At the time those Greek bonds were sold at less than 60% of their nominal price. From the moment the ECB started buying those titles, their prices climbed immediately to close to 90%.

Saving the Franco-German lenders

At such levels of prices the French and the German banks unloaded a round sum of €80 billion to the ECB. By doing this, they also avoided the famous ‘haircut’ of 53.5% that the Greek sovereign bonds held by the private sector suffered, in February 2012. On that occasion, the Greek banks and the Greek pension system were destroyed because they collectively held a round sum of €60 billion of those securities. Alas for Greece, the ECB held bonds were exempted from this haircut because the central bank did not belong to the private sector.

The poor paid to salvage the rich

Summing up, the ECB saved the French and the German banks handing then a round sum of €80 billion in exchange of the rather worthless Greek bonds they held. No German ‘professor’ contested the 2010 flagrant monetary financing of the big German and French banks. The German academic and financial orthodoxy complained though when the ECB, by reaching the limits of its mandate in the summer-fall of 2012, introduced its OMT program to support Italy and Spain.

As for the Greek taxpayers and in a wider sense all Greeks, they are now obliged to pay the maturing bonds the ECB holds from 2010 at their nominal value. However, the ECB says it returns to the Greek government the super profit it makes out of those securities, but it’s not at all clear how it estimates this part to be handed back.

In short, the German orthodox ‘professors’ who questioned the legality of ECB’s 2012 OMT program and the ECB itself by its ‘operations’ with Greek bonds back in 2010 have both acted hypocritically to the detriment of Greeks, while salvaging the German and French banks. It’s hypocrisy squared. Ads for the EU Court of Justice a negative decision about the OMTs would have sent the entire Eurozone monetary arrangement to chaos, because before and after 2012 the ECB had applied similar tools of very important significance.

Coming to the latest developments around Greece, Germany has been rejecting a substantial support for Athens, forgetting that the Greek taxpayers saved the German lenders back in 2010. Quite unfairly, Berlin and Paris refuse now to return the 2010 courtesy Greece did to their banks.

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Advertising

Featured Stings

A Young entrepreneur cries out: “start in Europe, stay in Europe”

For the future of Europe youth remains a priority

ECB ready to counter the rise of the euro?

Galileo funding: A ‘small’ difference of €700 million

Commission challenges Council over EU 2014 budget

The refugee crisis brings to light EU’s most horrible flaws and nightmares

UN-based World Summit Award (WSA) presents its master list on digital innovation with impact on society from 24 countries

Predicting two more years of economic stagnation

Why Eurozone urgently needs the ECB to print and distribute at least €500 billion

Economic recovery won’t tackle youth unemployment problem

The Americans are preparing for the next financial crisis

The Irish Presidency bullies the Parliament over EU budget

Commission to decide on bank resolution issues

Cancer research put at risk by General Data Protection Regulation? The possible dangers of a data privacy EU mania

European Union disenchanted with Turkey

European Banking Union: no one is perfect

US – Russia bargain on Syria, Ukraine but EU kept out

Paris, Washington, IMF against Berlin and ECB on money and interest

How I met the Panda Woman

Why do thousands of migrants need to be drowned for Brussels to wake up?

Greece and Ukraine main items on EU28 menu; the course is set

China’s New Normal and Its Relevance to the EU

EU seeks foreign support on 5G from Mobile World Congress 2015 as the “digital gold rush” begins

The developing countries keep the world going

What do Europeans believe about the crisis and the possible way out?

UN Environment Assembly 2017: where the world convenes to #BeatPollution

Meet the Junior Enterprise network at JEWC 2014!

Irish Presidency: Not a euro more for EU budgets

Berlin vies for a Germanic European Central Bank

Mood changes in Europe in favour of growth and jobs

European Energy Union: Integration of markets and need for in-house energy production

Is Eurozone heading towards a long stagnation?

Brexit mission impossible: Theresa May was so desperate that had to appoint Boris Johnson as Foreign Secretary

Mobile young people create the European labour market of tomorrow

EU’s tougher privacy rules: WhatsApp and Facebook set to be soon aligned with telcos

Brexiteer May gets lip-service from Trump and Turkish promises from Erdogan

Dreaming of China

Horse meat runs faster than authorities…

Why France, Italy and the US press Germany to accept a cheaper euro and pay for Greece

The European Parliament x-rays the troika’s doings

Azeri natural gas will keep the EU warm soon

EU Parliament: ECB accountable for not supporting real economy

Does Switzerland really need more medical students?

Syria: A bloody tracer of Trump – Putin rapprochement

Reality Shock

Global Citizen – Volunteer Internships

French election: Will France vote for a reformed or no EU?

Merkel had it her way with the refugees & immigrants but can Greece and Turkey deliver?

EU Migrant Crisis: Italian Coast Guard Headquarters and Italian Navy to give host national opening addresses at Border Security 2016 in Rome

MWC 2016 LIVE: Stripe gives payments leg-up to startups in emerging markets

EU fight against tax-evasion and money laundering blocked by Britain

The EU pollution rights trading system frozen

MWC 2016 LIVE: T-Mobile US reveals 5G trial plans

Youth policy in Europe not delivering for young people

Climate change and health: public health awareness in an international framework

EU free-trade agreements with Canada and US: imagine the fallout if put to national referendums

Why growth is now a one way road for Eurozone

What our leaders hide from us

A European Discovers China: 3 First Impressions

EU Council: The US airlines may freely pollute the European air

More Stings?

Speak your Mind Here

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s