SocGen: Maastricht Treaty was only a bluff

From:

UK £ default is not only unlikely, it is de facto impossible (November 9, 2011)

 https://publication.sgresearch.com//en/3/0/187421/101372.html?sid=37222134bf6ea285a1f909fb8fa2f2d6

Maastricht rules

Before tackling the complexity of UK law and parliamentary procedure, let us examine the international awkwardness. From Article 123 of the Treaty on The Functioning of The European Union

vi

:

1. Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as„ national central banks‟) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.
 

2. Paragraph 1 shall not apply to publicly owned credit institutions which, in the context of the supply of reserves by central banks, shall be given the same treatment by national central banks and the European Central Bank as private credit institutions.

This seems to prohibit the central bank purchasing government debt at auction. Seems to, but actually doesn’t.
 

Let us compare to the US. US Federal law is not only supreme, if necessary, it is enforced. For example, in 1957 Arkansas Governor Orval Faubus used his state’s National Guard to resist the implementation of the Supreme Court ruling in Brown v. Board of Education. So the central government, in the person of President Dwight D. Eisenhower, sent the Army, in the form of the 101st Airborne Division, to enforce Federal law. In very real practice, Federal law was enforceably supreme.

EU enforcement is far weaker. If a national politician insists on a course of action contrary to EU treaties, rules or judgements, well, that is how it is. A summit might be called. There might be a statement hinting at criticism of the recalcitrant.

But there are no troops. There is no action. And indeed, even the statement might not happen: the sovereign states of which the EU is comprised have been even lighter on countries acting in accordance with a genuine and important national interest.

In other words, the treaty functions as a guideline broadly defining good behaviour. It is not enforceable. 
 

But the UK has a reputation for being bound by its word, and particularly in matters of national debt, might wish to maintain this reputation. 

Not a problem. Rearranging the phrases for legibility, ‚national central banks‛ are ‚prohibited‛ from ‚the purchase directly from‛ ‚central governments‛ ‚of debt instruments‛. The purchase ‚directly‛, eh? So the BoE bidding at auction is prohibited. But the BoE may still instruct a reputable gilt-edged market maker, such as Société Générale, to bid on its behalf. Needless to say, Société Générale is happy to facilitate the purchase of gilts by any of its central bank clients.

Indeed, this isn’t so far from current practice. The DMO sells debt at auction. Société Générale bids and buys. And shortly after the BoE buys gilts as part of its monetary policy: Société Générale offers and sells. If needed, the temporal gap could be shrunk.

So the EU rules prevent nothing.