Thursday, February 13, 2014

Voters & Judges --- Are They Allowed To Do That?

In 1848, the Habsburg monarchy faced revolution from within. Citizens, disgusted by authoritarian rule, went on the streets. Emperor Ferdinand I. observed the protests from a balcony in the company of his Chancellor Count Metternich who was detested by the masses. The following dialogue between Ferdinand and Metternich was recorded:

Ferdinand: "What are all these people doing down there? They are so noisy!"
Metternich: "They are making a revolution, Your Majesty".
Ferdinand:  "But, are they allowed to do that?"

Were the judges in Karlsruhe allowed to rule on the OMT as they did last week? Were the Swiss allowed to vote as the did last Sunday?

Clearly, they both were allowed. If one deprived them of these constitutional rights, one might as well abolish the constitution. Many EU-elites were upset by the judges' and the voters' decisions. I can understand that; they certainly throw a wrench into the plans of these EU-elites.

Greeks should be encouraged by that. Greece may be a puppet of the Troika; Greece may no longer feel sovereign. I can sympathize with such feelings. However, there is still no EU law which determines which way Greek voters have to vote.

Obviously, voters have to be fully informed about the possible consequences of their vote. As far as I could tell, the Swiss voters were very well informed, as they always are when plebiscites are held. Thus, the Swiss must have known that their vote could potentially have very negative consequences for their economy and their living standard. If they voted for that, they will have to live with it.

Judges don't have to be informed about the possible consequences of their rulings; their job requires them to know that. The Karlsruhe judges essentially killed the OMT for the time being. Strangely enough, markets have not fallen into panic over that so far. Will that continue? The economist Andrew Watt wrote in a recent article the following: 

"Imagine the uproar if – to construct an extreme,  hypothetical example – a European-wide plan to counter tax evasion were to gain unanimous support in the European institutions, but be rendered inoperable because the Luxembourg constitutional court, on a 5-4 verdict, considers it incompatible with the country’s constitution’s provisions on property rights. The Luxembourg Constitution dates from 1868. I am not a legal expert, but it seems plain to me that Europe cannot function in this way".

He's got a point!


  1. Watt has a point. At the moment. The problem comes when the EU starts to get some real tax revenue. When the EU is allowed to borrow on the markets like a country. Then everyone has a real problem. Just look at the USA. Sure the states have their own laws but if the Feds come in they have power.

    Varoufakis's/ECB's plan is for the EU to be able to borrow money. He & the ECB will need an EU income type tax to support the borrowing. (Even if he does not realise it). This is a recipe for disaster for all those who believe government power should be as close to the people as possible.

    1. I think there is a misunderstanding. In Varoufakis' scenario, it is not the EU but instead the ECB which would issue bonds in its own name and without guarantee from the EU or individual states.

      If the EU were to borrow as one country, it would have to emit Eurobonds. Since the EU would not borrow to pay for its own expenes but, instead, to pass the funds on to individual states, repayment would have to come from those states. On the other hand, I suspects Eurobonds would be issued by individual states with the joint and several guarantee of all EZ-members.

    2. Unless I am mistaken, Varoufakis's key point is a surplus recycling mechanism.

      The ECB has no income to back up the sort of "borrowing" Varoufakis needs for his surplus recycling mechanism.

      They can only inflate.

      And I fail to see how the ECB printing money recycles/redistributes anything.

      For a recycling mechanism to work Germans need to be taxed in order to give money to incompetent governments like in Greece.

      The only way I can think this can be done is through some sort of EU tax, stealth or otherwise. I dont see how the ECB can do anything. but I stand to be corrected.....

    3. First, the ECB doesn't need income taxes to pay its liabilities; the ECB can print the money which is due. But that has nothing to do with Varoufakis. Varoukafis' proposal has 3 legs:

      1) lowering the borrowing costs not via Eurobonds but via bonds which the ECB emits (Varoufakis says that this would be within the ECB statutes; many other people say it wouldn't). Thus, the benefit of the low ECB refinancing cost would be passed on to, say, Greece. Greece would still be on the hook for the debt. What Varoufakis doesn't spell out clearly is what would happen if Greece could not pay that debt (that's why is is saying that this should only be done with debt up to the Maastricht level of 60%). Still, that is not really recycling.

      2) Banking union - today, the risks of Greek banks is carried by Greece. In the kind of banking union which Varoufakis proposes, that risk would be carried by all European banks. In fact, all European banks would carry the risk of all European banks (and, in the worst case, the tax payers). That's a risk-spreading but not a recycling.

      3) EIB loans: that is the funds recycling part of Varoufakis' proposal. The EIB would issue bonds at best rates, suck up the surpluses and lend the money to Greece (Varoufakis uses 'investing' instead of 'lending' but the EIB does not invest; it only lends).

      The cute part of Varoufakis' proposal is that, he argues, it could be implemented within existing treaties, statutes and institutions. That, however, is not legally tested. A friend of mine (Director of the ECB) told me that issuing bonds is outside ECB statutes. The banking union is unlikely to become the kind of union which Varoufakis envisages. And the EIB could lend today without any extra measures. If they don't lend to Greece, it means that they don't have qualified projects in Greece.

    4. Forgive me but I cannot find anything information about a central bank issuing its own bonds. Eurobonds are basically debt jointly issued by all the governments in the Eurozone.

      The banking union. The banks are already back stopped by the ECB and the taxpayer.

      The EIB. Banks lend it money. EIB lends money to public. Taxpayer is the back stop if things go pear shaped. Taxpayer makes next to no profit for the risk. Banks make huge fees managing the EIB money. Banks must have a large say in dictating EU/government policy in return for their loans. How anyone except a money centre banker could support this institution is beyond me.

      About sucking up surpluses. I am not sure how Varoufakis plans on getting his hands on BMW's (for example) "excessive" profits. Taxation/seizure would be the only way. I have asked him......

    5. 1 of 2
      Well, I really must have expressed myself poorly because you got me wrong on all 3 points. You may want to look up Varoufakis’ Modest Proposal where all the details are explained.

      1) ECB: what Varoufakis proposes (ECB issuing its own bonds without any guarantee from EZ-members) is the clever work-around to Eurobonds. The latter are treaty-wise not permitted. ECB-bonds are, per ECB statutes, neither allowed nor prohibited. Varoufakis interprets this to mean that whatever is not prohibited is allowed. Again, that is subject to a final ruling (you will get a supporting legal opinion for either side…). Varoufakis wants the ECB, with its top credit rating, to act as a go-between between financial markets and Greece as the borrower. The ECB would formally not be lending to Greece; it would only pass on the funds and commit to the markets to service the debt. I.e. Greece remains the primary party on the hook for this debt. However, should Greece not pay, the ECB would be on the hook. That is why Varoufakis limits the amount of Greek debt eligible for this excercise to the Maastricht level of 60% (and, I believe, this debt would have super-senior status). Thus, one could argue that Greece could ALWAYS pay this debt and the ECB would, in practice, NEVER have to pay up on behalf of Greece. Sounds reasonable to me. Again, there is no recycling here. All concerned countries have much more than the Maastricht level of debt. Thus, it would only be a re-financing of the Maastricht-relevant debt.

      2) Banking union: at this point, if Deutsche Bank went bankrupt, that would, initially, be entirely and exclusively a problem of Germany. Only if Germany went bankrupt in the process would it become a problem for others. The same goes for French, Italian and other countries’ banks. The Greek banking sector has, formally, not been rescued by the EU. It was recapitalized by the Hellenic Financial Stability Fund (which, of course, refinanced itself through the ESM). Thus, if the Greek banking sector went bankrupt, it would be a primary problem of Greece, and for the ESM only to the extent that it lent money to the HFSF to recapitalize Greek banks. No further repercussions on other European banks and/or tax payers. (in Ireland, the Irish tax payers were forced to back the problems of all Irish banks).

      A true banking union like the one Varoufakis proposes has ALL banks back each other up by making contributions to a deposit insurance fund which would protect all depositors. In Cyprus, the depositors would not have had a bail-in but, instead, they would have been protected by that fund. That kind of a union has become an Illusion (because, you guess right, of the Germans). Banks will still be the primary problem of each country. Only in further steps may it become a problem for other banks, the ESM and/or tax payers. Still, this would only be recycling if and when banks and/or tax payers are called upon to bail out Greek banks; not right away.

    6. 3) EIB: the EIB DOES NOT lend money to the public, i. e. to governments!!! The EIB lends money to projects which have passed a stand-alone project evaluation test. I am not aware of any limitation for the EIBs financing Greek projects. However, the EIB – at least during my time in banking – always required a portion of co-financing from the country of residence of the projects. I believe Varoufakis (and Tsipras) is proposing that this co-financing requirement be eliminated or radically reduced. Would make sense. The EIB could finance Greek projects today, assuming co-financing were available and projects would exists. But: even if you scratch the co-financing requirement, it is most unlikely that the EIB will find more than a few BEUR, if at all, of eligible Greek projects. Thus, if you want the kind of foreign funding via the EIB (“recycling”) which Varoufakis/Tsipras have in mind, you need to make a new EIB program where, possibly, the government itself could borrow.
      That would be the recycling part; however, not at all the way you see it. Obviously, the EIB would not take BMWs profits to recycle them to Greece. The EIB would raise the money in capital markets, as it always does, at very best interest rates. If BMW invests its profits in capital markets, then, yes, these funds would be recycled to Greece. But money is an interchangeable commodity and cannot be traced to its source. The German economy accumulates surpluses out of its current account surplus. Those surpluses must be invested abroad. They will be invested in things like US Treasuries, loans to foreign countries or, in this case, to buy EIB bonds.

      The EIB is not the tax payer directly. It is owned by national governments but no national government guarantees it. Of course, creditors of the EIB assume that they have the implied support of national governments.

      Olny the EIB part of the Modest Proposal is recycling.

    7. Not your fault at all. I did not read it properly. I did not grasp it was Varoufakis's proposal for the ECB to issue bonds.

      Why he wants to put so much power in the hands of so few is beyond me. I think he has a blinkered view of history.

      The EIB lending to governments. Surely this is Eurobonds (issued by EU) under another name? ie the taxpayer is still on the hook as you implied.

      On the whole it sound like a mess. Much easier for the Greek government to balance its books and let the markets assess their success.

    8. You misunderstand the EIB. The EIB DOES NOT make general purpose loans to governments! Instead, the EIB almost exclusively finances projects; good projects! Project loans of the EIB are not primarily based on the creditworthiness of the borrower but, instead, on the viability of the project. If projects are successful, the loans will be repaid out of project cash flow. For example (and an extreme example that is): the EIB might finance today a project in the near-bankrupt Ukraine which project has one sole objective: to make products which will be 100% exported to Germany. The Ukraine might go bankrupt or into civil war: as long as the project operates successfully, the EIB will be paid back out of sales revenues in Germany. Obviously, if revolutionaries were to close the project down, things would be different.

      The EIB has an excellent track record of project lending. I am not aware of any speculative mishaps which the EIB ever had. Yes, the EIB operates with tax payers money as capital but that capital - due to the successful performance of the EIB - has continually increased in value. Thus, I would consider the chance that the EIB, within its present policies, might ever have to resort to tax payers' money (because of huge losses) as extremely low.

      Obviously, if the Varoufakis proposal had as its objective that the EIB were to amend its policies and make general purpose loans to governments instead of project financing, that could affect the creditworthiness (and performance!) of the EIB dramatically. I have asked Varoufakis more than one time what the EIB, in his scheme, should finance in Greece but I could not get an answer. I suppose the answer would be infrastructure projects. But infrastructure projects generally don't generate the revenues needed to pay back the loans.

      Finally, I agree with you: yes, it is a mess!

    9. Yeah, I was not making myself clear at all. The EIB represents the interest of the governments. Banks lend it money so it can implement government policy. Text book fascism, at least with national government borrowing there is a veil of democracy.

      I cant understand how it has such a good record. I mean that would be so out of character for anything owned and run by government.

      It also begs the question why would banks want to go through a middleman? If the projects were profitable why would they not lend directly? And smaller banks which are not involved with the EIB must be slightly hacked off because the EIB is taking away potential business.

      Personally I think something is rotten with the EIB

      The EIB lent 48 million Euros to a company with 145 billion dollar turnover. Puurleeassseee! - Im not against tax havens at all. I just don't like my tax money being sent there!!

      And this is just what we know about....

    10. To be perfectly honest with you, if we get to the level of calling EIB activities as textbook fascism or that something is rotten with the EIB, we are both better off if we discontinue this debate. One last try.

      The EIB is not run by politicians. Instead, it is run by very competent and professional bankers; by experts in project financing.

      I thought I had made it clear that the EIB is not lending to governments. One again, the EIB is not making general purpose loans to governments. Only loans for projects.

      The EIB is not a middleman nor is it taking business away from smaller banks. The opposite is the case. The EIB never provides the whole financing for a project; only the base financing. Get back to the Urkrainian example. Private banks may not want to undertake that risk. If, however, the EIB comes in with the base financing, that gives private banks the confidence to provide the rest of the financing. Why confidence? Because the EIB does a project analysis which goes way beyond the analysis of a private bank. Some borrowers don't want EIB financing because the approval process is so enormous. However, that also explains why the EIB has such a good track record.

      The EIB has lower refinancing costs than private banks and it passes that benefit on to borrowers. So another reason why EIB base financing is attractive is that the cost of it is lower than that of private banks.

      The EIB, just like the EBRD in London, is there to facilitate investments which private banks alone would not finance.

      Again, if you are prepared to discuss seriously, we can continue. If you want to remain stuck in dogmas like textbook fascism, I would prefer that we don't.

    11. One last point. Since you focus on cases where corruption is involved with EIB financing, that has nothing to do with the EIB. When the EIB finances a good project in a corrupt country like the Ukraine, much of the investment is going to be sourced in the Ukraine. The EIB cannot influence the corruption in a country. It could say that they won't finance projects in corrupt countries but then a lot of these countries would have a lot less investment and a lot less economic growth. Sochi could not have been developed without financing from serious institutions but do you really think that none of that financing ended up in places where they should not have ended up? Should the serious institutions have refused to finance Sochi because Sochi was/is located in a corrupt country?

    12. "The EIB is not run by politicians. Instead, it is run by very competent and professional bankers; by experts in project financing. " - I am not sure what you point is here. You can say exactly the same thing about social security programs, education or any other government department. Simply replace "bankers" & "project financing" with the relevant terms. Both are guided by government policy.

      Also, from the EIB website "we provide finance and expertise for sound and sustainable investment projects which contribute to furthering EU policy objectives."

      A as its own website acknowledges, the EIB serves EU policy and is financed by the private sector.

      Let me pull back from my previous comment and say I do not know if this is good or not but I do believe there is scope for massive conflicts of interest especially given the size of the EIB and the amount of money in controls.

      Banks will be financing it in return for leverage on government policy and the projects the EIB gets involved in will be influenced by what these banks are interested in financing ie the EIB has to put forward projects investors “like”.

      And basically that is it. You have the EU dependent on large banks to get things funded. Of course this is part and parcel of government except with the EIB, as you say, there is no democratic oversight.

      There is no day to day involvement by politicians but the EIB is financing larger EU agendas and the EIB is owned by the EU governments and that opens up all sorts of influential doors to big companies who put money into the EIB.

    13. Remember: EIB stands for European Investment Bank. EBRD for European Bank for Reconstruction and Development Bank. There is also the World Bank and others. Even Alexis Tsipras wants an Investment Bank for Greece. If your conspiracy theories were correct, one would have to do away with all those institutions. The outcry from the beneficiary countries of those institutions would be enormous.

  2. Alas, Greece has little in common with Switzerland or Germany in terms of constitutional rights. The only time in recent years that the constitution has been invoked in an important case is when the Council of State decreed that only ethnic Greeks are entitled to citizenship -- rejecting the Pasok law on citizenship acquisition for children born in Greece. Of course, there is nothing in the Constitution forbidding this: the racist judges just made it up, to suit their own political agenda.

    We can say the same about the political interference from German polticians and EU cretins such as Barroso during the last elections in Greece. They threatened Greeks with dire consequences if they dared to vote for Syriza, thus depressing the vote and preventing a Syriza election win.

    In any constitutionally protected country, the President would have stepped in to postpone the elections and take the matter to the European Courts. In Greece, nobody said or did anything. That is how the Constitution is used here: to support the position of the government of the say and to promote the right wing views of the judges. (By the way, most judges in Greece are appallingly ignorant people, with little grasp of the law or much else)

    So, don't compare northern Europe (or actually, Spain or Italy) with Greece. Greece is still in the Middle Ages with human rights, constitutional rights etc. To be fair, the idea of a Constitution is rather recent -- dating back to the military and popular confrontation with Otto in 1843 in what was renamed Constitution Square.But still, 170 years is enough to learn how to do things properly.

  3. Klaus
    Yes, Andrew Watt has a point, and it was a good article, I'm happy he did not suggest a solution to his hypothetical Luxemburg case. He is flirting with casuistic justification (the end justifies the means), that is always a dangerous and difficult thing, who should be the judge? Who suffers from the means and who benefits from the results? A normal judge can not do it, he is bound by laws and rules, in some nations also by "common law" concepts. You are flirting with the same thing in your proposal for SEZ's in Greece, but with much less convincing aguments than Andrew Watt in his case.
    PS. You may want to read Panos Kroko's blog on his BLEEDING EDGE BLOG 16 February "The Tale of Two Countries stuck in Corruption", the language may not be everybodys taste but read it for the content. while you are at it read his other blog for Innovators-Entrepreneurs-Founders, strong tobacco.

    1. 1 of 2
      I had read this article and since I spent some years living in Argentina, I can confirm that, yes, Greece and Argentina have a lot in common. I have written a couple of articles about this but I can't find them. Essentially, I had hoped that Greeks would act like Chileans but, most regrettably, they acted like Argentines. Here is a little tale:

      When I lived in Argentina (4 years in the mid-1980s), inflation was running at close to 30%. Not 30% per year; 30% per month!!! A prominent Argentine politician (and mother) said the following in an interview:

      "I recently faced a real moral dilemma. I saw that our young son was hording the weekly allowance which we gave him. He put the pesos in a savings box. Now, by all the standards which I believe in, I should have congratulated him for that; saving is good! But then I thought if I teach him that, I am educating him for financial ruin. What reality would force me to do is to tell him: go spend the money; or buy dollars; or anything of value --- but don't save it! So the solution was that I gave him dollars."

      The big difference between Argentina and Greece is that Argentina is a country of enormous natural wealth ("God replenishes during the night what the Argentines destroy during the day"). Yes, in the early 20th century, the peso was a reserve currency. Argentina's GDP was greater than that of Canada.

      Well, what Andreas Papandreou was for Greece, Juan Domingo Peron was for Argentina. Where Papandreou discovered the disenfranchised and made them better off by through borrowed money, Peron discovered the 'shirt-less' and made them better of by drawing on Argentina's wealth. Borrowed money turned out as a more finite resource than natural wealth.

      The game of ‘robbing the state and protecting the proceeds in foreing bank accounts’ was incredible! The general estimate among us bankers was that foreign money of wealthy Argentines was always at least as high as the state’s foreign debt. It was the miraculous conversion from foreign state debt into private income and wealth! A little tale about corruption.

    2. 2 of 2
      I was running a mid-size American bank in Buenos Aires then (after having done the same in Chile before). During my first 3 months on the job, we had a stamp tax examination. A routine thing, I thought (American banks, then, did their best to never violate local laws abroad; always top corporate citizens). On the inspector’s first day, my Operations Manager came to me and suggested that the inspector wasn’t really here to work. She guessed that he was here for a bribe. He had already pointed out faults on our part which would amount to 1,5 MUSD in fines. He knew a consulting firm which could fix all of that for 70 TUSD. So I asked to meet the man. I thought I would just ‘have a conversation’ with him; feel him out; explain to him a bit how American banks worked in the area of corruption. The man was just not interested in any conversation (not even in coffee, for that matter). He came right to the point: 70 TUSD consulting fee or 1,5 MEUR fine. I told him to keep doing his job. I we had really made mistakes, we would pay the fine. He wasn’t happy. The projected bill got higher and higher and one day, he said he was now at a fine of 15 MEUR and still counting. I then checked with my head office and was happy to hear that they didn’t want me to do anything out of the ordinary. So I had to have a final conversation with the inspector. Normally, one would think that he would be the totally embarrassed one and not I. Well, it was the other way around.

      The inspector told me how dumb I was. That I was risking my entire career which he said would be over when the bill for 15 MEUR would come when I could fix the whole problem with 70 TUSD. In a nutshell: I was totally embarrassed to tell someone that we preferred to be honest. Needless to say, that day the inspector decided to finish off his inspection; working was not his cup of tea… When the bill came, it was a reasonable amount. We took advantage of a sort of amnesty which lowered the final damage to 70 TUSD. Ironically, the same amount which the bribe would have been.

      This was a long story to show how much corruption had become a standard and rather widely accepted form of transacting business; not only with the government; with everybody. I don’t think the Argentines will ever change. It will always be the clever operators taking advantage of the uneducated and/or naïve broader masses. And since Greeks are quite similar to Argentines in many areas, chances are that they will never change, either.

  4. Klaus
    Do not be too hasty, you might be talking about yesteryears EIB. 29 June 2012 The European Council allocated BEUR 10,0 to EIB for loans to Greece. In their recommendations (THE LONG HAUL: MANAGING EXIT FROM FINANCIAL ASSISTANCE) the BREUGEL think tank recommended much more capital be made available. They also recommended that EIB revise their procedures to facilitate faster investment. The European Council injects grants into EIB, who rubber stamp them as loans to investments in viable and qualified souvlaki shops and motor ways? Why do I think that the EIB is not immune to political pressures? Be careful, slippery road ahead!
    Of cause Breugel is independent; the chairman of the board is Jean-Claude Trichet.
    More and more I ask myself, not, how can we save Greece? But why? What do we expect Greece will contribute to the European project?

    1. To clarify: standard EIB policy is to make only project loans (not general purpose loans). Exceptions:

      * they offer banks 'global lines' which banks can then use to make their own project loans. Essentially, that is cheap funding and most of the benefit goes to the banks and not to the borrowers. I don't know whether Greek banks have such global lines.
      * specifically for Greece, I remember that, a couple of years ago, the EIB arranged for trade financing lines for banks. That may well be the 10 BEUR you are referring to. Such trade lines are NOT standard. They were a special deal for Greece.