European Union A Fateful Month

The threat of a Brexit and ruling on a European Central Bank bond buying plan will shape Europe's future in June, writes a leading German economist.
Much hangs in the balance for Europe – can it survive the tricky times ahead?

 

June 2016 will be a fateful month for Europe, with two decisions on the agenda that are of critical importance to the future of the European Union: The June 23 decision on the Brexit and, two days earlier, on June 21, the German Constitutional Court's ruling on the OMT bond-buying program of the European Central Bank (ECB).

Of course, the Brexit is the more important of the two. After French President Charles De Gaulle had blocked accession attempts by the United Kingdom in 1963 and 1967, the country finally succeeded in joining the European Union in 1973.

But there was strong opposition in Great Britain to the negotiated terms, leading to a referendum on the issue of membership in 1975, in which the majority voted in favor of remaining in the European Union. Only the special conditions that Prime Minister Margaret Thatcher later negotiated seemed to mollify the E.U. skeptics, at least temporarily.

The euro crisis stirred up new skepticism over Europe in Great Britain. Although the country bears practically none of the cost of the crisis, there are growing fears among Britons that one day their country will be drawn into the maelstrom of liability for the debts of banks and the countries of Southern Europe. More recently, the refugee crisis has been a strain on British nerves.

After Prime Ministers Edward Heath and Thatcher put an end to immigration from the Commonwealth, or former British colonies, the British now fear becoming the victim of a new wave of migration from the European Union. Only the fear among undecided voters of the risks of a Brexit will probably signify a slim majority for remaining in the European Union.

The OMT ruling by the German Constitutional Court, expected in June, also has the potential to change the European Union.

Nevertheless, the European Union is ailing. The inability of top officials in Brussels to present a credible and convincing strategy for Europe, one that draws on the continent's self-regulating forces and market dynamics, is so obvious that many Europeans now find it difficult to feel confident in these forces. The days of unconditional belief in the inevitability of the path to Europe taken in Brussels are over.

Though less spectacular, the OMT bond-buying ruling by the German Constitutional Court, expected in June, also has the potential to change the European Union. At issue is the question of whether Germany's central bank, the Bundesbank, may participate in the unlimited guarantee the European Central Bank gave buyers of the sovereign debt of crisis-ridden countries in 2012.

Investors who buy the government bonds of a crisis-ridden country would no longer have to fear a bankruptcy of that country, because the ECB would buy the critical securities from them before the risk of bankruptcy becomes virulent. The only requirement is that an application be filed with the European Stability Mechanism (ESM).

This transfers the bankruptcy risk to taxpayers in the healthy countries of the euro zone, who, in the event of a national bankruptcy, would be forced to permanently forego a portion of the profit distributions in the euro system.

The decision revolves around the question of whether the interpretation of the treaties already approved by the European Court of Justice (ECJ) is compatible with the German Basic Law, or whether the power of the purse, to which only the German parliament or Bundestag is entitled and which cannot even be revoked by the Bundestag, is being eroded. The ECJ cannot decide on this issue.

There are two reasons to believe that the German Constitutional Court will impose conditions on the Bundesbank for participation in the OMT.

First, the Bundesbank reportedly already consulted with the German court over the new quantitative easing purchasing program, and in doing so it demanded a restriction on the joint liability of the central banks.

Second, the court, in a preliminary position statement it issued on the OMT two years ago, already voiced the suspicion that the ECB is overstretching its mandate.

If the German court sticks to its position, the spreads on the markets, which are much too small today and no longer reflect the true risks of the investments, will increase again. This would put an end to many a daydream, but it would also be a step toward strengthening self-reliance and a return to fixed budget limits, without which no economic system can survive, including the euro system.

 

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