New Twists in the Plot (German Court and Greece)

There have been two developments that are serving to keep the euro consolidating in the North American morning. The first has to do with the Germany Constitutional Court and the second involves Greece.

A new claim was brought to the German Constitutional court by a CSU member of parliament. Peter Gauweiler, a noted euro sceptic, has filed a challenge to the Outright Monetary Transaction bond buying program announced by the ECB last week. Press reports indicate that the Constitutional Court is examining whether to postpone the decision on the ESM/fiscal treaty expected late this week. Apparently, an emergency session will be held today and a decision about this latest charge will be made tomorrow.

It is difficult to imagine that German Constitutional Court would rule that the ECB's OMT violates the German constitution. Nevertheless, the sell-off in Italian and Spanish bonds and local equities have accelerated since the news broke.

Remember what the initial case is about. The Constitutional Court is to decide whether to grant an injection delaying the formal establishment of the ESM and the fiscal compact, while they decide the legality of it at a future date.

Turning to Greece, the governing coalition has failed to reach an agreement on achieving new savings of at least 11.5 bln euros. Greek Prime Minister Samaras is meeting with the Troika today and again mid-week. While some decision was expected Eurogroup meeting at the end of the week, it appears nothing significant on Greece will be decided.

On one hand, the Troika's report, was expected in August and then pushed back to Sept and now, according the an article in Der Spiegel is unlikely until early November. The German paper intimates that postponing until then was done "partly out of consideration for the United States" and the apparent desire not to have an intensified crisis on the eve of the US election. Der Spiegel suggests the Troika can go along with that as it is understood that Greece has sufficient funds (including monies raised in bill sales) until then.

On the other hand, the thrust of the Der Spiegel piece is that Merkel herself has changed her mind. Previously she was prepared to have Greece leave and now, she reportedly is siding with France and the EU in seeking to keep Greece within the EMU. The article argues that Merkel new appreciates the risks posed by a Greek exit. In particular, rather than stabilize the situation, a Greek exit could force exactly the debt union (joint bonds?) that Merkel hopes to avoid, in order to stabilize Spain and Italy.

Der Spiegel's report also suggests Merkel sees her own political interest in continuing to "muddle through" until after next year's German Bundestag election. At the same time, it is clear that pressure must continue to be exerted on Greece to get as much reform as possible. The German paper suggest that emphasis has changed.