Monday, 10 September 2012

Mike Lenhoff: Green light needed for equity markets

Commenting in this morning’s Financial Times on Mr Weidmann’s decision to vote against the European Central Bank’s Outright Monetary Transactions (OMTs) initiative, Wolfgang Munchau notes that; ‘... the ‘consensus view among German commentators is that the ECB has lost its independence ...’. It might be put otherwise.

It is not that the ECB has lost its independence – certainly Mr Draghi would take issue with this – but that the Bundesbank has lost is authority over ECB monetary policy and that this might be hard to swallow. Let’s now hope that Germany’s Constitutional Court does not decide to throw a spanner in the works.

This Wednesday, Germany’s Constitutional Court will finally rule on the legality of the European Stability Mechanism (ESM), as well as on the fiscal compact. The ESM was supposed to start life in July but has since been hung up in the German Court. While a favourable ruling is not a done deal necessarily, Germany’s Finance Minister has actually said, quite directly, that he was sure the Court would approve.

What matters is that any qualification or condition that might be associated with a favourable ruling does not interfere with what Mr Draghi hopes will be perceived as a ‘fully effective backstop that removes tail risk from the euro area.’ The ESM is a critical agent of the entire support operation in assisting sovereigns and in dealing with market fragmentation. It thus needs an endorsement that enables it to respond without shackles that might undermine the entire capability of what the ECB intends. More >

Mike Lenhoff
Chief Strategist

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