Published in Business Spectator (Melbourne), 10 June 2010
When European leaders last month agreed on their trillion dollar package to support the continent’s ailing currency, they managed to impress the markets only for a couple of days. After that, the euro continued its slump against the dollar, sterling, and the Swiss franc as if nothing had happened. Market participants clearly believe that politicians cannot be trusted to keep their promises about the stabilisation of the euro.
A case in Germany’s Federal Constitutional Court confirms that such scepticism is appropriate. Even the German government now argues in court that the EU’s trillion dollar agreement is merely a political declaration of intent, not a binding agreement. This makes it doubtful that the billions needed to bail out Greece and other struggling countries will ever flow.
The Germans have a curious relationship to their country’s institutions. In an opinion poll, 45 per cent said they trusted parliament and only little more (48 per cent) Chancellor Angela Merkel’s government. Yet an impressive 76 per cent of all Germans stated that they had trust in the country’s highest judges at the Federal Constitutional Court.
The Constitutional Court judges in their shiny, purple robes enjoy a reputation of political independence and judicial rigour. In a country that holds contempt for its political class this makes them appear like demigods aggrieved citizens can implore.
Reality is not quite as glamorous. If any comparison with ancient mythology was appropriate, it would not be with divinities. The Oracle of Delphi may be a much better point of reference.
Whether in ancient Delphi or at the highest German court in Karlsruhe, those seeking guidance have no guarantee of finding it. The wisdom emanating from the court is not much clearer than the prophecies of the oracle. The only difference is that Germany’s judges do not require any hallucinogenic vapour to generate their often impenetrable messages.
It is a habit of German politicians to routinely task the court with verifying the constitutional validity of political decisions. Such judicial review has been happening for decades, and all parties have used the court for their political manoeuvres from time to time. The Free Democrats once took the cake when they challenged a decision they made in government by suing themselves straight afterwards. Only German politics aficionados would understand the logic.
Given this well established practice, it was completely unsurprising that the euro bailout package would find its way to Karlsruhe. In fact, the first guarantees for Greece had already been taken to the court, although at the time the judges refused to block them with an injunction.
In the current case, this may be different. At the heart of the matter is the question of whether parliament was allowed to provide a blanket €148bn safety net for the common currency. As the newsmagazine Der Spiegel reports in its current issue, the president of the court has asked a range of German and European institutions for written opinions on the potential consequences of an interim order stopping the package.
Angela Merkel’s government was quick to respond. In a 38 page-long document it argues that the EU’s supposed shock-and-awe package was actually non-binding in a legal sense. The reason behind this move is clear: a binding commitment would hardly survive legal scrutiny. In a previous judgement on the EU’s Lisbon Treaty, the constitutional court had already decided that further moves towards a full-blown European federation would require a referendum in Germany.
To circumvent this problem, Merkel’s government had little choice but to argue that they had in reality not given a watertight commitment to provide their share of the trillion dollar package. This may well serve the purpose of securing its constitutional validity, but markets now have every right to wonder what this means in practice.
If the guarantees for the future of the euro turn out to be nothing but non-committal posturing, they would be worth less than the paper they were printed on. Any future German government might then reconsider whether it still wants to take part in international efforts to prop up the euro.
The package may thus be ineffective but still legally valid. However, it has always been improbable that the court would block the package. Despite its reputation of alleged political independence, in the past the judges have often enough done legal acrobatics to allow political decisions of the government to jump over constitutional hurdles.
In this way, they had permitted early dissolutions of parliament twice although the spirit (if not the letter) of the constitution was against them. They have sometimes declared laws invalid yet did not prevent them from being applied. Such deference to political realities is odd but so is the fact that the judges are selected by political parties behind closed doors. Whether there is a connection between the two is a matter for debate.
Under these circumstances, the final decision of the constitutional court hardly matters anymore. If it strikes down the rescue package it is dead because other European nations will almost certainly not go ahead without German participation. However, if the court upholds the measure, it will still only be a vague promise that others should not rely on. You should not bet on Germany paying €148 billion for the dubious pleasure of upholding monetary union with a country as economically unimportant as Greece.
If international markets or European politicians want to know the future of the euro, they better not ask Germany’s constitutional court. Especially on Greek affairs, the Oracle of Delphi may give a much clearer answer.