Nomura doesn’t want you just to think about the German constitutional court’s decision on the legality of EFSF bailouts (coming later today. Should appear here).
Nomura wants you to think around it:
While many think it a near certainty that the German government will win its case and the court will not overturn the bailout, we judge it naïve at best to rule this an unequivocal loss for the challengers. We certainly doubt the EU bailouts will be forced to be dismantled, i.e., as we have argued previously, even if declared illegal, the court will probably state that the government has taken the necessary steps to address this in the form of the ESM treaty change (which allows some form of fiscal transfer only if there is strict conditionality and if the issue is systemic in nature). Yet, the challenges could be more of a poison barb, allowing the bailouts to continue but possibly constraining them to be nearly unworkable…
In fact, the court’s previous decisions have mostly awarded the Bundestag continued and enhanced power in all EU deliberations, bucking the trend to devolve powers to EU institutions… in this case, we do not expect the court to award parliament power through any explicit procedure, but this push towards greater parliamentary sovereignty appears to be accepted by all parties.
That’s from Nomura European rate strategist Nick Firoozye, who’s right to point out that the court decision is only the latest stage in a trend towards German domestic defection from eurozone rescues.
Defection’s an apt word because this trend is really about giving fairly small and fragmented political actors, Angela Merkel’s own backbenchers and junior coalition partners, a powerful veto over support for the EFSF.
If we were being really political-science-y about it, the eurozone is more like a two-level game than ever. A concept which means that any international negotiation between states is always and simultaneously a domestic entanglement too. Savvy negotiators will often play their own domestic troubles off other players in order to get a better deal. Greece would like to do that very much now that its austerity plan is coming apart at the seams, but now it’s also the turn of the eurozone’s north. Lots of traders thought the Finland collateral issue for example (another, very entangled two-level game) had no “market impact”. Dead wrong.
It was a harbinger.
That’s why the court decision matters even if it doesn’t deliver a judgement that would tear apart German support for the EFSF. Even so, Firoozye notes that even a ‘compromise’ benediction for Bundestag oversight of the EFSF would complicate the facility’s financial engineering even further. The Bundestag may end up taking a leaf out of Denmark’s book and creating a special (sub) committee to oversee the EFSF (Denmark uses a committee to cross-examine the prime minister ahead of every EU Council meeting). One issue with that:
And as each guarantor’s finance minister votes not just on packages but also on individual drawdowns, the Bundestag is now debating giving itself the power to guide the finance minister’s vote in all such decisions made by the guarantors in the EFSF. (We note that currently package approvals and drawdowns are both subject to votes. Presumably pre-emptive packages will be subject to similar votes, but it is unclear when and how often votes will be sought on secondary market interventions).
An EFSF operation to buy Italian debt (say) would mean billions of euros and require several interventions over time, given the size of the market (and Italy’s unforgiving refinancing schedule). It is also already not clear whether the European Central Bank understands that Italian sovereign liquidity is seriously broken and that setting fiscal conditions on bond purchases might be beside the point.
What chance a German junior coalition MP getting it instead?
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Update 0910 UK time — Decision’s in:
RTRS-GERMAN CONSTITUTIONAL COURT SAYS REJECTS LAWSUITS AIMED AT BLOCKING GERMAN PARTICIPATION IN EURO ZONE BAILOUTS
Related link:
Italy makes last-minute budget U-turn – FT