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Greece Gets the Boot, Germany Takes the Lead: Europe's Endgame

The goal is "price stability."

There are some other interesting quotes. When talking about "leveraging" the EFSF by creating a Special Purpose Vehicle to invest in sovereign debt, Weidmann says: "an SPV buying government bonds -- would be a clear violation of this prohibition" [i.e., the prohibition on monetary financing].

Finally, the endgame has two possibilities:

"While the first would be a return to the founding principles of the system, but with an enhanced framework that really ensures sufficient incentives for sound public finances, the second way would imply a major shift entailing a fundamental change in the federal structure of the EU and involving a transfer of national responsibilities, particularly for borrowing and incurring debt, to the EU."

The possibilities are:

1. Get back to where we started (all countries on side with debt to GDP and deficits to GDP -- note Greece was never on side because the data they submitted in their application was bogus). However, change the system to provide "sufficient incentives," aka non-negotiable sanctions to keep the system in equilibrium.

2. Major change in the structure such as an outright fiscal union.

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Wiggle Room at the ECB?

Gavyn Davies' excellent blog at FT argues that there is wiggle room (my words, not his). He cites the Protocols in the Treaty of Lisbon. In particular, Protocol 4, article 20, which reads:

"Other instruments of monetary control The Governing Council may, by a majority of two-thirds of the votes cast, decide upon the use of such other operational methods of monetary control as it sees fit, respecting Article 2. The Council shall, in accordance with the procedure laid down in Article 41, define the scope of such methods if they impose obligations on third parties."

Here's the full text of the Protocols.

This seems to imply that by a two-thirds vote of the Governing Council the ECB could do just about anything as long as it was consistent with price stability. It is a substantial loophole. In addition, Davies points out that there are no mandated "limits" to the buying and selling of securities. However, I am convinced the Bundesbank would not see it as a loophole.

However, I think there is an even more substantial loophole. Consider this one:

... the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, it shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union.

Two points:

1. Price stability is the "primary" objective, but not the only objective.

2. Notice the words "shall support the general economic policies."

Again, I don't think the Bundesbank would agree with this interpretation. Nevertheless, some could make the case for the support of general economic objectives -- as long as it was not inconsistent with price stability.

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The Federal Constitutional Court

It is reasonable to think that there are differences of opinion between the President of the Bundesbank, the Chancellor and others in Germany. However, it is very important to understand that Germany is bound by its own constitution.

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