On January 1, 1999, the euro was launched. As so often in the history of the ‘European project’, political zeal overcame economic rationale. It was either that or blind stupidity – or perhaps an ungodly combination of both. In this case, the fateful decision was taken to launch the monetary union without a fiscal union.

Financial contortions, again politically motivated, allowed countries such as Greece to adopt the euro. They duly binged on cheap credit, exploiting record low spreads versus the eurozone’s risk free instrument – the German Bund. Everything looked to be going swimmingly for the euro fraternity, as impressive and hitherto unheard of Teutonic/Greek solidarity manifested itself in an army of Porsches rolling into Athens.

Of course it could not last, and the markets eventually came to realise that a Greek bond was not actually a Eurobond – its repayment potential rested on Greece alone. Other countries were not liable, in any way, for its debt obligations. Greek debt was therefore much riskier than fuzzily assumed in the afterglow of the euro launch fireworks display. Cue rising spreads, the eurozone debt crisis, and Mario Draghi’s pronouncement that the ECB will do ‘‘whatever it takes to preserve the euro’’ and adding, in a somewhat sinister manner, ‘’Believe me, it will be enough.’’ This was on July 26, 2012 – the chickens finally came home to roost more than a decade after the ill-conceived launch ofthe euro.

It is a tragedy of economic history that nobody in the room at the time asked: “Mario, could the definition of ‘whatever it takes’ ultimately include the ability to resort to illegal means outside your current mandate?’’

Perhaps those present understood that this would have inevitably led to a legal type discussion as to what was within the ECB’s mandate. This is an area which might as well be avoided when you know that the answer would ultimately be along the lines of “whatever is needed to do whatever it takes to keep our European aggrandisement fantasies alive is within our mandate, by fair means or foul – but it will always be fair in the final analysis”.

The question then becomes: Who will make this final analysis? What the ECB duly announced was the Outright Monetary Transactions (OMT) programme – the ECB would be prepared to purchase eurozone government short-term bonds. (This would have the effect of lowering the interest rate payable by the subject country.)

Article 123 of the Lisbon Treaty states that: “Overdraft facilities or any other type of credit facility with the European Central Bank in favour of …central governments…of member states shall be prohibited, as shall the purchase directly from them by the European Central Bank...’’

It is a tragedy of economic history that nobody in the room at the time asked: ‘Mario, could the definition of ‘whatever it takes’ ultimately include the ability to resort to illegal means outside your current mandate?’

The spirit of Article 123 is clear enough – and the OMT is clearly in violation of that spirit. The risk of debt mutualisation was never given the green light. It should be a straightforward enough concept to grasp, even for EU bankers, and yet we have to be subjected to usual legal chicanery so that what was not agreed at the outset can be forced upon us subsequently. The hypocrisy has at least taken on the virtue of consistency.

We therefore move the goalposts on to the question of legality. On February 7 the German Federal Constitutional Court in Karlsruhe published its thoughts on the matter. The Karlsruhe court is the guardian of German basic law.

In a sense, the tectonic plates of national sovereignty and European empire building meet there.

The OMT issue represents a momentous occasion where one plate is going to have to be subsumed by the other. The alternative of an earthquake would mean Germany exiting the eurozone. That is surely implausible, except less so in circumstances where it is left with no choice. It is precisely because German exit is unimaginable that the ECB may feel that it can risk overstepping the mark.

The Karlsruhe court made the following important observations:

“The OMT decision does not appear to be covered by the mandate of the ECB.’’

“The OMT decision aims at a prohibited circumvention of Article 123.’’ (see excerpt above)

“If purchasing of government bonds were admissible every time the monetary policy transmission is disrupted, it would amount to granting the ECB the power to remedy any deterioration of the credit rating of a euro member state…’’

This is reassuringly tough, no nonsense type language.

However, the Karlsruhe court referred the case to the European Kangaroo Court (EKC), otherwise known as the European Court of Justice (ECJ). My initial interpretation was that this represented a disappointing acknowledgement of a higher authority. This was also the market’s interpretation. Closer inspection gives rise to an alternative theory – that Karlsruhe may have tied the ECJ’s hands as to what Karlsruhe will deem acceptable from a German perspective.

Karlsruhe actually did comment on what form the OMT might take in order to be possibly acceptable. Those conditions, such as the ECB effectively assuming primacy over other bond holders by not accepting haircuts, would render the OMT largely ineffective.

Karlsruhe was not prepared to re-ignite the eurozone crisis. It remains to be seen whether the ECJ will ignore Karlsruhe’s implied guidance as to how to rule in respect of the OMT.

mwebster@curmiandpartners.com

This article is the objective and independent opinion of the author. The information contained in the article is based on public information.

Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.

Martin Webster is head of equity research at Curmi and Partners Ltd.