Monetary Law Blog

German president questions legality of ECB bond buys

Reuters.com reports that German President Christian Wulff questioned the legality of the European Central Bank's bond-buying programme on Wednesday, highlighting the strength of opposition in Germany to the controversial plan.

Reportedly, Wulff added his voice to German opposition against the ECB's bond-buying programme citing a Treaty provision prohibiting the ECB from buying bonds directly from governments.

"I regard the massive acquisition of the bonds of individual states via the European Central Bank as legally questionable," he said in the opening speech at an economists' conference in Lindau, Germany. "This ban only makes sense if those responsible don't circumvent it with comprehensive purchases on the secondary market," he added, so Reuters.com reports.

The ECB buys the bonds on the secondary market. Critics of the purchases say they push the ECB into the fiscal policy arena, overstepping its mandate and threatening its independence.

Legal Vacancy in IMF

The IMF Legal Department is seeking a Senior Counsel to join the fiscal law team of its Financial and Fiscal Law Unit in Washington DC. Interested applicants should visit www.imf.org/jobs for the full vacancy information and apply to job #1100368 by June 20, 2011.

Economic Governance in the European Union

This week the EU Commission proposed a comprehensive package of legislation regarding fiscal discipline.

From the Commission website:

"The legislative package reinforces Member States’ compliance with the Stability and Growth Pact (SGP) by establishing the new concept of prudent fiscal policy-making (PFPM) and should ensure convergence by Member States towards their Medium-Term Objectives. It also addresses excessive debt – rather than just deficits – more proactively than in the past. Macroeconomic surveillance will also be tightened. A new Excessive Imbalance Procedure (EIP) will prevent and correct macroeconomic imbalances and divergences in competitiveness.

Stronger enforcement is a major part of the new legislative package. Two regulations detail a set of gradual sanctions for non-compliant Member States, including non-interest bearing deposits which would be converted to fines in the event of repeated non-compliance. To reduce discretion in enforcement, a new “reverse voting mechanism” is also envisaged. Under the new voting rules, which would apply when imposing sanctions, a Commission proposal will be considered adopted unless the Council overturns it by a qualified majority.

Finally, effective enforcement of the SGP requires that EU provisions are applied at the national level. A new Directive, therefore, stipulates minimum requirements to be followed by Member States to ensure that their national budgetary frameworks are consistent with the EMU budgetary framework."

European financial stabilisation mechanism

The EU's finance ministers have adopted a regulation establishing a European financial stabilisation mechanism with a total volume of up to 500 billion euros.  The mechanism is part of a comprehensive package of measures to redress the financial situation in Europe.

 

According to the regulation, member states in difficulties caused by exceptional circumstances beyond their control may ask for financial assistance from the mechanism. These circumstances could be a serious deterioration in the international economic and financial environment. It should allow the Union to respond in a coordinated, rapid and effective manner. Its activation will be subject to strong conditionality to preserve the sustainability of public finances of the beneficiary member state and enable it to regain its capacity to finance itself on the financial markets. Loans will be managed by the European Central Bank.

 

The facility foresees a lending envelope of up to 60 billion euros. In addition, euro area member states are ready to complement such resources through a Special Purpose Vehicle up to a volume of 440 billion euros. This instrument is guaranteed on a pro rata basis by participating member states in a coordinated manner. It will expire after three years. The International Monetary Fund (IMF) will participate in financing arrangements and is expected to provide at least half as much as the EU contribution.

 

At the same time, the EU will urgently start working on the necessary reforms to complement the existing framework to ensure fiscal sustainability in the euro area. Ministers underlined the importance of strengthening fiscal discipline and establishing a permanent crisis resolution framework. In addition, they emphasised the need to make rapid progress on financial market regulation and supervision. They explored among possible initiatives a stability fee, which would commit the financial sector to bear its share of the burden in case of a crisis, and a global transaction tax.

 

Source/copyright: EU website

 

The Greek crisis and the future of the euro zone

Reuters.com has ran an article analyzing five scenarios of the Greek crisis:

1. Greece rescues itself
2. Greece muddles along in 'slow burn' crisis
3. Greece heads toward default
4. EU bails out Greece
5. EU launches wider bailout

In every scenario Reuters describes the scenario, gives an estimate of the probability of the scenario, and analyzes market implications.