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Jesse Livermore
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Gold Market Wire

News, analysis and commentary for gold traders and investors

The Long View

European Commission Threatens Legal Action over German Court Ruling

May 11, 2020 - (Gold Market Wire) - The European Court of Justice (ECJ) is threatening legal action against Germany over the German Constitutional Court's (GCC) recent decision to have the European Central Bank (ECB) justify it Bond buying program.

The reality of the increasingly dramatic showdown over the GCC's ruling, which also challenged the ECJ's authority to preside over such matters as German law, have set the EU and Germany on a collision course that could seriously damage the EU as an institution. In practical terms the European Commission would be taking legal action against Germany as a sovereign state and EU member.

The looming confrontation has, at its core, the Bundesbank's participation in the ECB's bond buying program. The program has been in full force for a decade now, and sees the ECB as the main buyer for member state government bonds - that mostly yield around 0%. The previously unthinkable thought is that Germany, the economic powerhouse behind the Euro, may be getting ready to quit Mario Drag's (and now successor LaGarde's) “QE to eternity” monetary policy.

Without hyperbole, one can easily construe this as the most serious challenge to the EU's authority since its inception. Some commentators believe it could be fatal. It certainly appears as if the entire EU structure is at a make-or-break point. Of course, front and center in this dispute is that if EU law is open to interpretation in each and every EU member state, there is, in fact, no EU law. The German Constitutional Court is openly and brazenly questioning a fundamental policy of the ECB, and the judicial remit over it. The GCC is, in essence, questioning Germany's participation in QE to infinity and the power of the ECJ to enforce legal power within Germany.

Seeing as the EU has a dis-unified, though single, currency system (while some members don't even use the Euro), has no army, has no common language, no unified debt market and (presently) no freedom of movement – and has lost its second most important member state recently with the UK's departure ... all it has is its “legal team”, i.e., its supra-national government sitting in Brussels, producing paper work as lawyers/bureaucracies are won't to do. And, of course, it's failing currency; the “Euro”.

It's not a lot to go on.

So what does this all mean for Gold? To answer that we have to consider the spectre of the Bundesbank ending the Draghi policy of buying bonds at 0% ad infinitum until they run out of the proverbial 'ink' (aka MMT in action). Some believe that such a departure by the Bundesbank could be managed by the ECB, who could simply direct their buying program through an alternative member-state central bank, but, more likely, it would appear as the beginning of the end of the Euro.

The GCC is saying that barring compliance with their demands in a timely fashion - to justify the bond buying program as one that does not impinge on fiscal policy and is purely monetary in nature (as if such a thing were even possible), that the Bundesbank will no longer participate in such bond buying programs and that the Bundesbank's position should be unwound. How in the name of God are they going to that? By letting the bonds mature and riding them down as they collapse? Or by selling them off and crashing the market? An ECB bond buying program that lacks the Bundesbank isn't really going to have a lot of teeth and the process seems to be almost as if Germany is preparing to have its central bank disengage from the ECB's most important program; relentless bond and asset purchases. Those purchases have been the hallmark of its past decade, although it has produced little in terms of a successful economic outcome. Europe is, in fact, a basket case economically. In fact, its a step away from economic paralysis. Industries that don't produce anything anyone wants, at enormous costs; a workforce more interested in holidays than work - six weeks a year plus public holidays. Compared to the Chinese and South Koreans, it seems a joke. Moreover, the demography of Germany and the EU is a disaster. When the “Germans Die Out” (h/t Gunter Grass) – what then? The EU's economic powerhouse is slowly retiring from the world. It has no replacement population of the same work ethic and culture.

Lastly, in terms of jurisdiction, the GCC decision does an 'end run' around who gets to decide what on any matter. They have told the ECJ they don't have jurisdiction. That can be argued for 100 years, as lawyers are won't to do – but in the end, the EU/Brussels/ECB and ECJ and European Commission have no tanks, no armies, and very little raw power to enforce anything. They have only legal threats, which in the world of true realpolitik, stands for very little.

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