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German Court Case Has Potential To Force Euro Exit

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Last summer to avert the euro crisis, Mario Draghi announced Outright Monetary Transactions (OMT) to support the Spanish and Italian bonds. Now finally the German constitutional court is to hold hearings this week on the legality of the ECB using OMT as a tool to finance deficits in bankrupt states. Already Bundesbank’s Jens Weidmann has submitted a report to the court objecting to OMT but the panel looks split and the ruling could go either way. This has the potential to possibly force a German euro exit or at very least throw the eurozone back into a full blown crisis.

Udo di Fabio, the constitutional court’s euro expert until last year, said the explosive case on the legality of the European Monetary Union rescue machinery could provoke a showdown between Germany and the European Central Bank (ECB) and ultimately cause the collapse of monetary union.

“In so far as the ECB is acting ‘ultra vires’, and these violations are deemed prolonged and serious, the court must decide whether Germany can remain a member of monetary union on constitutional grounds,” he wrote in a report for the German Foundation for Family Businesses.

“His arguments are dynamite,” said Mats Persson from Open Europe, which is issuing its own legal survey on the case on Monday.

Dr Di Fabio wrote the court’s provisional ruling last year on the European Stability Mechanism (ESM), the €500bn (£425bn) bail-out fund. His comments offer a rare window into thinking on the eight-strong panel in Karlsruhe, loosely split 4:4 on European Union issues.

The court is holding two days of hearings, though it may not issue a ruling for several weeks. The key bone of contention is the ECB’s back-stop support for the Spanish and Italian bond markets or Outright Monetary Transactions (OMT), the “game-changer” plan that stopped the Spanish debt crisis spiralling out of control last July and vastly reduced the risk of a euro break-up.

germanThe case stems from legal complaints by 37,000 citizens, including the Left Party, the More Democracy movement, and a core of eurosceptic professors, most arguing that the ECB has overstepped its mandate by financing the deficits of bankrupt states.

Berenberg Bank said the case was now “the most important event risk” looming over the eurozone, with concerns mounting over an “awkward verdict” that may constrain or even block ECB action.

Dr Di Fabio said the court, or Verfassungsgericht, does not have “procedural leverage” to force the ECB to change policy but it can issue a “declaratory” ultimatum. If the ECB carries on with bond purchases regardless, the court can and should then prohibit the Bundesbank from taking part.

The Bundesbank’s Jens Weidmann needs no encouragement, say experts. He submitted a report to the court in December attacking the ECB head Mario Draghi’s pledge on debt as highly risky, a breach of both ECB independence and fundamental principles. The ECB does not have a legal mandate to uphold the “current composition of monetary union”, he wrote.

Dr Di Fabio said it was hard to imagine that an “integration-friendly court” would push the EMU “exit button”, but it can force a halt to bond purchases. This may amount to the same thing, reviving the eurozone crisis instantly.

“It would pull the rug from under the whole project. It is the OMT alone that has calmed markets and saved the periphery,” said Andrew Roberts from Royal Bank of Scotland. Mr Draghi said last week that the OMT was the “most successful monetary policy in recent times”.

The court dates back to the Reichskammergericht of the Holy Roman Empire created in 1490, but it was revived after the Second World War along the lines of the US Supreme Court.

It has emerged as the chief defender of the sovereign nation state in the EU system, asserting the supremacy of the German Grundgesetz over EU law, hence the German term “Verfassungspatriotismus”, or constitution patriotism.

The court backed the Lisbon Treaty but also ruled that Europe’s states are “Masters of the Treaties” and not the other way round, and reminded Europe that national parliaments are the only legitimate form of democracy. It said Germany must “refuse further participation in the EU” if it ever threatens the powers of the elected Bundestag.

It issued another “yes, but” ruling last September. It threw out an injunction intended to freeze the ESM, but it also tied Berlin’s hands by capping Germany’s ESM share at €190bn, and blocked an ESM bank licence. It killed off hope of eurobonds, debt-pooling, or fiscal union by prohibiting the Bundestag from “accepting liability for decisions by other states”.

Crucially, the court said the Bundestag may not lawfully alienate its tax and spending powers to EU bodies, even if it wants to, for this would undermine German democracy.

Chief Justice Andreas Vosskuhle said at the time that Germany had reached the limits of EU integration. Any further steps would require a “new constitution”, and that in turn would require a referendum.

 

Source: The Telegraph

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Global Risk

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Grant Williams explains Global risk and hedging through a Gold leasing system which is about to collapse.

Euro Crisis Explained

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Clarke and Dawe sum it up 🙂

Solution To Banking Crisis

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It can only get better from here 😉

bankers solution

21 Signs Of Global Crisis To Worsen

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The following are 21 signs that the global economic crisis is about to go to a whole new level….

#1 Bank of Israel Governor Stanley Fischer says that the global economy is “awfully close” to recession.

#2 It was announced last week that the unemployment rate in Greece has reached an all-time high of 25.1 percent.  Unemployment among those 24 years old or younger is now more than 54 percent.  Back in April 2010, the unemployment rate in Greece was only sitting at 11.8 percent.

#3 The IMF is warning that Greek debt may have to be “restructured” yet again.

#4 Swedish Finance Minister Anders Borg says that it is “probable” that Greece will leave the euro, and that it might happen within the next six months.

#5 An angry crowd of approximately 40,000 angry Greeks recently descended on Athens to protest a visit by German Chancellor Angela Merkel…

From high-school students to pensioners, tens of thousands of Greek demonstrators swarmed into Athens yesterday to show the visiting German Chancellor, Angela Merkel, their indignation at their country’s continued austerity measures.

Flouting the government’s ban on protests, an estimated 40,000 people – many carrying posters depicting Ms Merkel as a Nazi – descended on Syntagma Square near the parliament building. Masked youths pelted riot police with rocks as the officers responded with tear gas.

The authorities had deployed 7,000 police, water cannon and a helicopter. Snipers were placed on rooftops to ensure the German leader’s safety.

#6 The debt crisis is Argentina is becoming increasingly troublesome.

#7 The government debt to GDP ratio in Italy is expected to hit 126 percent this year.  In Greece, it is expected to hit 198 percent.  In Japan, it is expected to hit a whopping 237 percent.

#8 Standard & Poor’s has slashed the credit rating on Spanish government debt to BBB-, which is just one level above junk status.

#9 Back in the year 2000, the ratio of total debt to GDP in Spain was 192 percent.  By 2011, it had reached 363 percent.

#10 Record amounts of money are being pulled out of Spanish banks, and many large Spanish banks are rapidly heading toward insolvency.

#11 Manufacturing activity in Spain has contracted for 17 months in a row.

#12 It is being projected that home prices in Spain will fall by another 15 percent by the end of 2013.

#13 The unemployment rate in France is now above 10 percent, and it has risen for 16 months in a row.

#14 There are signs that Switzerland may be preparing for “major civil unrest” throughout Europe.

#15 The former top economist at the European Central Bank says that the ECB has fallen into a state of “panic” as it desperately tries to solve the European debt crisis.

#16 According to a recent IMF report, European banks may need to sell off 4.5 trillion dollars in assets over the next 14 months in order to meet strict new capital requirements.

#17 In August, U.S. exports dropped to the lowest level that we have seen since last February.

#18 Economics Professor Barry Eichengreen is very concerned about what is coming next for stocks in the United States…

“I’m worried that stock markets in the United States in particular have gotten ahead of economic growth”

#19 During the week ending October 3rd, investors pulled more than 10 billion dollars out of U.S. mutual funds.  Overall, a total of more than 100 billion dollars has been pulled out of U.S. mutual funds so far this year.

#20 As I wrote about the other day, the IMF is warning that there is an “alarmingly high” risk of a deeper global economic slowdown.

#21 When shipping companies start laying off workers, that is one of the best signs that economic activity is slowing down.  That is why it was so troubling when it was announced that FedEx is planning to get rid of “several thousand” workers over the coming months.  According to AFP, “its business is being hit by the global economic slowdown”.

Source: theeconomiccollapseblog.com

ESFS & ESM To Get Banking License

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It looks to be a matter of weeks before the ESFS and ESM get a banking license and then its just a matter of Ctrl+P for the eurozone as Michael Pento gives his views to KingWorldNews and what this means for gold prices.

“In my estimation, the ECB is about three or four weeks away from giving a banking license to the EFSF and the ESM.  This will lead to unlimited purchases of European debt, and an unlimited dilution to their currency.” 

Pento also warned, “I am telling my clients, I am gearing them towards the inevitable inflation,” because “you will see the most salient moves in precious metals, base metals, energy and agricultural stocks and commodities.”

Pento also discussed what will happen in other key markets, but first, here is what Pento had to say about the Fed and ECB decisions:  “My first impression was that the reports we had from the Wall Street Journal that the Fed was imminently going to interfere with the markets (with more QE), once again proved to be untrue.  Bernanke is waiting for Jackson Hole.  He’ll make some kind of announcement, like he did back in 2010, and then he will start to put his plan to destroy the currency in effect, probably in September.”

“Mario Draghi doesn’t understand the commitment he has pledged to undertake.  If he is actually going to purport to the market that he will control the interest rates of the seventeen countries within the euro, my question for him would be, how long will you monetize European debt?

 How much euro dilution will occur?  The ECB will become the entire market for European debt….

“There will be no private market for these bonds.  This is a recipe for severe stagflation which will destroy the middle-class and European savings.

 However, he seems to be very confused because Draghi wouldn’t commit to these purchases being unsterilized.  This means he could be buying short-term European debt, and selling mid and longer-term European debt, which would further drive up yields.  For instance, the Spanish 10-Year right now is 7.17%, up 6.5% in one day.

 It tells me that he doesn’t really know what he’s doing.  Draghi had to take one side or the other.  He either had to say the PIIG countries borrowed so much debt that they can no longer pay them back and they must default explicitly, or we are going to stupidly try to monopolize the entire bond market, and monetize all of this debt.

 We have an unlimited bazooka, with unlimited ammunition, and here we go, we’re starting today.  But by doing what he did, he promised the world, and delivered nothing.  That is the reason why we are down today on the Dow.  That is the reason why Spanish and Italian yields are blowing out today.

 In my estimation, the ECB is about three or four weeks away from giving a banking license to the EFSF and the ESM.  This will lead to unlimited purchases of European debt, and an unlimited dilution to their currency.”

 When asked what investors should be doing in this environment, Pento responded, “I am telling my clients, I am gearing them towards the inevitable inflation.  But I think it’s silly to go ‘all-in’ right now.  We have significant holdings in precious metals and we have written covered calls against that strategy.  Then, we are ready to go all-in once we have a firm commitment on the part of these two central bankers to massively monetize the debt.”

 Pento also spoke about what he expects to unfold as central planners add more liquidity:  “I think, temporarily, the euro will rise.  Bond yields will fall for a very truncated period of time.  You will see the major averages scream higher, but you will see the most salient moves in precious metals, base metals, energy and agricultural stocks and commodities.”

John Williams, ShadowStats: Hyperinflation is Coming

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Interview with John Williams from ShadowStats giving his opinion that Hyperinflation is coming by 2014. His gives a good sumation of where the US is right now and where he sees it going.

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