Judgment Day For The Euro And What's At Stake

Tyler Durden's picture

Originally posted at Project-Syndicate,

Hans-Werner Sinn - Judgment Day For The Euro

Hans-Werner Sinn is Professor of Economics at the University of Munich and President of the Ifo Institute for Economic Research. He also serves on the German economy ministry’s Advisory Council. Hi… Full profile

Europe and the world are eagerly awaiting the decision of Germany’s Constitutional Court on September 12 regarding the European Stability Mechanism (ESM), the proposed permanent successor to the eurozone’s current emergency lender, the European Financial Stability Mechanism. The Court must rule on German plaintiffs’ claim that legislation to establish the ESM would violate Germany’s Grundgesetz (Basic Law). If the Court rules in the plaintiffs’ favor, it will ask Germany’s president not to sign the ESM treaty, which has already been ratified by Germany’s Bundestag (parliament).

There are serious concerns on all sides about the pending decision. Investors are worried that the Court could oppose the ESM such that they would have to bear the losses from their bad investments. Taxpayers and pensioners in European countries that still have solid economies are worried that the Court could pave the way for socialization of eurozone debt, saddling them with the burden of these same investors’ losses.

The plaintiffs represent the entire political spectrum, including the Left Party, the Christian Social Union MP Peter Gauweiler, and the justice minister in former Chancellor Gerhard Schröder’s Social Democratic government, Herta Däubler-Gmelin, who has collected tens of thousands of signatures supporting her case. There is also a group of retired professors of economics and law, and another of “ordinary” citizens, whose individual complaints have been selected as examples by the Court.

The plaintiffs have raised several objections to the ESM.

First, they claim that it breaches the Maastricht Treaty’s “no bail-out” clause (Article 125). Germany agreed to relinquish the Deutsche Mark on the condition that the new currency area would not lead to direct or indirect socialization of its members’ debt, thus precluding any financial assistance from EU funds for states facing bankruptcy. Indeed, the new currency was conceived as a unit of account for economic exchange that would not have any wealth implications at all.

The plaintiffs argue that, in the case of Greece, breaching Article 125 required proof that its insolvency would pose a greater danger than anticipated when the Maastricht Treaty was drafted. However, no such proof was provided.

Second, Germany’s law on the introduction of the ESM obliges Germany’s representative on the ESM Council to vote only after having asked the Bundestag for a decision. According to the plaintiffs, this is not permissible under international law. If Germany had wished to constrain its governor’s authority in this way, it should have informed the other signatory states prior to doing so. On the other hand, Germany’s representative on the Governing Council is sworn to secrecy, which, the plaintiffs argue, precludes any accountability to the Bundestag.

Moreover, the plaintiffs claim that, while the ESM treaty is restrictive in granting resources to individual states, requiring a qualified majority vote, it does not specify the conditions under which losses are acceptable. Losses can result from excessive wages paid by the ESM Governing Council members to themselves, a dearth of energy in efforts to collect debts from countries that have received credit, or other forms of mismanagement. And, because Governing Council and Executive Board members enjoy immunity from criminal prosecution, misbehavior cannot be punished.

If losses arise, they must be covered by the initial cash contribution of €80 billion ($100 billion), which then would be topped up automatically by all participating countries according to their capital shares. If individual countries are no longer able to make the necessary contributions, others must do so on their behalf. In principle, a single country might have to assume the entire burden of losses. Such joint and several liability, the plaintiffs assert, contradicts the Court’s previous statements that Germany should not accept any financial commitments stemming from other states’ behavior.

Worse, according to the plaintiffs, although the liability of any country vis-à-vis external partners is limited to that country’s share of capital, this limitation does not apply to other signatory states. It is theoretically possible that a single country could be held liable for the ESM’s total exposure of €700 billion.

Finally, the ESM cannot be considered on its own, but must be seen in the context of the total exposure amount, which includes the €1.4 trillion in bailout funds that have already been granted. In particular, the Target2 credit drawn by the crisis-afflicted countries’ central banks, which already totals almost €1 trillion, should also be taken into consideration.

Nobody knows how the Constitutional Court will rule on these objections. Most observers believe that the Court is unlikely to oppose the ESM treaty, though many expect the judges to demand certain amendments, or to ask Germany’s president to make his signature subject to certain qualifications.

It is good that the Court’s decisions cannot be forecast, and even better that the Court cannot be lobbied or petitioned. The European Union can be based only on the rule of law. If those in power can break its rules on a case-by-case basis, the EU will never develop into the stable construct that is a prerequisite for peace and prosperity.

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q99x2's picture

Now if you said that we would not have any more rumors once September 12th passed I'd be shocked -- thrilled.

Zer0head's picture

Isaac Live

Media desparately seeking Katrina's younger brother

but he turned out to be poseur




flacon's picture

People don't feel bad about stealing any more... it's only MONEY for goodness sake!:



macholatte's picture

An absolutely awesome video. Just one more reason to love the interent and you tube.

intric8's picture

The EU wants to be as keynesian as the US, but it will never work on a factional basis, as is the case with the countries that comprise the EU. The right hand never knows what the left is doing. Spain's bank books are a good case in point,

Dr. Engali's picture

Of course they will rule in favor of the treaty. There has been sufficient time for them to be wined, dined, layed, and bought off.

Bicycle Repairman's picture

Even if they don't rule in favor of the treaty, Germany is printing anyway.

metastar's picture

The decision was made before it reached the court. Now they are trying to find the right CYA words to write up their "decision".

TheFourthStooge-ing's picture

Dr. Engali said:

Of course they will rule in favor of the treaty. There has been sufficient time for them to be wined, dined, layed, and bought off.

I believe you are correct. In this modern world, the "law" is conveniently flexible, much like Laffy Taffy®. For the ruling class elite, the law is soft, it stretches and deforms, and it can be pulled into any shape desired. It's more of a "suggestion of law" than a "rule of law". For the human cattle subjects of the rulers, the law is like taffy left in a freezer. It is solid, unyielding, and will pull out the fillings in your teeth.

Unfortunately, the edifice of the entire Euro system has been built on a foundation of Laffy Taffy®, and it cannot be repaired. It has become a sticky, sagging mess. There is nothing solid about it. Participants agree to what they find agreeable at any given moment and ignore any inconveniences. All of the treaties and agreements which supposedly bind together Euroland are nothing more than empty words. All of the meetings, conferences, and summits of the last two years have been nothing more than children playing charades.

This is why it doesn't matter what the German court decides. There are no solutions to the predicaments which face a system built upon lies. The "leaders" have been playing their games because, being children, they think that if they close their eyes, the problems no longer exist.

The entire global system is freaking doomed because the only response of which the retards in power are capable is trying to wish the problems away.

wandstrasse's picture

nobody wants to be the one who busts the ponzi. All these dates... Greece insolvent, Troika report, constitutional court decision... have the only purpose to create a bit suspense for the media. The real, effective outcome of all this shit are ever stronger powers that be... all the way down to 1984.

Ned Zeppelin's picture

Yep, the Court will rule in favor of the ESM.  For one simple reason: The German High Court does not want to be the one blamed for throwing the match into the pile of gasoline soaked wood that is the European financial construct.  With Malleable Law, they will find an answer.

chump666's picture

I f*cking love that movie

Long-John-Silver's picture

They will simply replace the current worn out can with a shiny new can they will continue kicking down the road.

Zero Govt's picture

well i've heard of polishing a turd but i don't think Merkals Govt can ever get a gloss back on this can, it has too many holes shot through it

this court case is showing how many Rules the German Govt have already pissed on to socialise debtors ...Merkal is about as "tough" with Europe as a bartender serving a drunk another triple gin and tonic 


roadsnbridges's picture

All these people speaking, and no teleprompter in sight.

Cuz ZH won't


Fair and relevant, diks.

Clever Name's picture

"Rule of law"


Its always 'big decision coming on xx date'.

We wont know...until we do...

q99x2's picture

We have a De Facto globalist rule of an elite class that pre-empts and subordinates natural rule of law. And, they are at war with nations around the world at this time. WWIII if you like is uder way. Because of the nuke the world could no longer be successfully conquered. So an attempt is currently under way through the use of financial terrorism to establish an elite NWO. Things do not make sense during times of war.

old naughty's picture

"...WWIII if you like is uder way...through the use of financial terrorism to establish an elite NWO."

You wish their wish?

pamriallc's picture

It's time to look at the numerator and the denominator, and just like 4th grade math, begin cancelling debt based on who owes what to whom. It's going to happen anyway. If both parents (families) owe the other parents $1 billion and neither can pay the other unless they enslave one another's kids, they're better off to cancel the debt. Not a tough choice. Suddenly free. No one died. Just get it done already..... shawnm@pamria.com.cn

chump666's picture

haha European is run by a central bank. 



ThunderingTurd's picture

I am certain these Judges are familiar with what happened when TARP was not passed.  They will of course vote for what ever the the criminal banksters tell them to vote for.  Banksters are in the business of selling fear and these banksters apparently can sell ice to eskimos.  

Jlmadyson's picture

Judgement day cometh that is for sure.

The Navigator's picture


The can has been kick so many times down the road, it's not even recognizable as a can anymore.

Bring IT ON already.

Dr. No's picture

Lol to those are looking to the courts to preserve justice.....

geewhiz190's picture

someone will get to the judges the way the mutual fund industry got to the SEC commission trying to prevent the next meltdown in money market funds.  the FED is now too overleveraged to backstop any funds that may fold thanks to, in this case ,two republican commissioners(they could just as easily been dems-but they weren't) who killed any chance the SEC had to limit the potential damagethis part of the shadow banking world can do. these german judges are in potentially the same spot. if they rule according to the law they go against the expediency hoped for by merkel's party and basically hand the bill for the flawed design structure of the euro to the german public, much the way the US public will be forced to pay for a failure in money market land. How much more of this shit can people take? why should i have to worry about under -captilised money funds because the financial service industry can buy off a couple of dick-heads political hacks?

pamriallc's picture

Sort of like two guys at a bar, discussing WHICH DRINKS TO ORDER *FOR THE ROAD* before driving home.... these guys are effectively arguing over something fundamentally improper.... so stop arguing and take a cab home..... Loose Fed Policy = Liquid Confidence.....

Bush was right in 2008 when he said famously "The Bankers got Drunk" and the Ron Paul's of the world are now correctly repeating "The *Central Bankers* are Drunk" shawnm@pamria.com.cn

bigwavedave's picture

So it all rides on 1) a Krout court 2) Chinese Politburo 

Bunga Bunga's picture

Court will kill ESM and then some financial hell will break lose, but all and everything can and will be blamed on Germany then until Germans finally agree to the United States of Europe.

Harbanger's picture

The US of Europe? :) Germany fell into it's own trap and will need to recapitalize their failing banks soon.

The trend is your friend's picture

Sept 12th feels like eons away.  By then the S&P will be 1500 and once the ESM has been approved by the high courts it will rally to 1650 by 12 12 12.  The Mayan's weren't talking about the the end of the world, they were talking about the the permanent end of af all the Bears silly

Boilermaker's picture

Wow, what an interesting thesis.

Yeah, there going to do it anyway. Get fucking used to it. What?? You thought the financial elite were going to get hosed by 'law', 'ethics' , and 'morality'. Fucking please. This is chess not checkers. Get real.

kevinearick's picture

every so often, i simplify...so here it is for my german, passive aggressive sisters...again...

it wasn't stupid enough to kidnap our children, confiscate our property, throw us in jail, and decry us non-persons. now, they have gotten themselves in so deep that they can't bail themselves out with all their capital combined, and they are desperately delaying, hoping that labor will bail them out again.

the reply hasn't changed. when they pay real wages to real people, they will get bailed out. until then, CAPITAL CAN GO F- ITSELF. labor always marches on, whether capital leads the middle class over the cliff or not. check your History; labor always has a bigger bomb ready to drop on capital's head.

buzzsaw99's picture

Hasta la vista, baby.

TheFourthStooge-ing's picture


Hasta la vista, baby.

That's for goddamn sure. Reality always bats last.

old naughty's picture

Don't say bye...

Oktoberfest is not here yet.

FeralSerf's picture

"The European Union can be based only on the rule of law. If those in power can break its rules on a case-by-case basis, the EU will never develop into the stable construct that is a prerequisite for peace and prosperity."

Those in power in America have been breaking its own rules for years on a case-by-case basis.  Why the fuck does anyone think the European Union can't (or isn't) doing that as well?  "Stable construct", "peace and prosperity"?  I want some of that stuff that guy's smoking.

GeezerGeek's picture

As I read that quoted line I began to think of the GM and Chrysler bondholders that Obama threw under the bus when he bailed out the UAW unions. Among those hurt were public union pension funds. I assume that we all realize this: the US is no longer a "stable construct". It is also obvious to anyone who cares to see that "peace and prosperity" is not part of the Obama plan. The question remains unanswered to me: would Romney be any better? Also: could Romney be any worse?

It all makes me long for Dwight Eisenhower. I liked Ike.

ISEEIT's picture

Okay idealist.

You can cash in on getting fucked. The 'real' world has not one tear nor shiver of respect for your childlike view.

It's going to play out. These political shitheads view economic reality as a rock in the boot. They've been briefed. They know the deal. I feel sorry for these fuckers left/right who don't get it that they are fucked regardless.

The game has never been more obvious and Idiotacracy is in full bloom.


analyzer_66's picture

 Idiotacracy is in full bloom = +1

Where else can the Obongo in the whitehouse and his ex-governor buddy Corzino get away with a 150 billion dollar theft and still walk free to this day ? 

Dumbing down of america, fully completed courtesy Obong/BiteMe Biden.

chart_gazer's picture

no person or entity wants to be the one to end the global charade.  like the us supreme court calling obamacare a tax, these bozo's will find some contorted way to allow the presses to print trillions of euros to let the games go on.  bet on it, you can take it to the bank. there will be a global coordinated printing weekend this fall to facilitate it.

JLee2027's picture

The Court will do nothing my goodness....

analyzer_66's picture

is it true that the main problems behind the spanish banking system are much like the US's - real estate  bubble, popped and now RE values including commercial RE are tanking and they cannot mark these assets to market without plummeting into insolvency?

exodus11's picture

That's the cover story. Only numnuts believe this propaganda. The laws are for the sheeple, not for them.  This is validated every time they either don't follow the laws or just change them when they need to.

"The European Union can be based only on the rule of law. If those in power can break its rules on a case-by-case basis, the EU will never develop into the stable construct that is a prerequisite for peace and prosperity."


Glass Steagall's picture

"The European Union can be based only on the rule of law"

Are you fucking kidding me?

GeezerGeek's picture

The whole concept of 'rule of law' is so nineteenth century. Get with it, everyone. This is the third millenium, and - much like most of history showed - might makes right. Those with the most guns and the most bullets get to make the rules.

honestann's picture

Anyone who believes ANYONE in ANY so-called "government" or "government agency" has ANY tendency to comply with laws (or ethics) --- is a massively naive fool.

The days of predators-DBA-governments following ANY laws are LONG OVER.  Those predators will do whatever they want-to-do, are paid-to-do, or are afraid not-to-do under threat by other predators.

Expect them to let all the predators do whatever they please.  And if by some amazing fluke they don't, the predators will do whatever they please anyway --- and nothing will happen to them, as always.

DutchDude's picture

Because art.125 limited the EU to bail out countries they created art.136 which bypasses art.125.

That's how these bastards roll; they make rules untill they don't like them anymore; then they change 'em.