Published in Business Spectator (Melbourne), 20 September 2012
When Germany’s Constitutional Court cleared the path for the European Stability Mechanism and the Fiscal Compact, markets and governments joined in a collective sigh of relief. With the last legal hurdle cleared, the €700 billion fund to stabilise Europe’s monetary union, rescue over-indebted governments and struggling banks could be established and the euro saved. At least that’s what international news media reported.
While visiting my parents in Germany last week, we watched on TV as the constitutional court’s president Andreas Vosskuhle delivered his judgment. Half an hour into the verdict, my mother gave up and left the room bewildered. German legal language may not be easy to understand at the best of times, but the dense and complicated jargon of the constitutional court always occupied its own category on the open-ended scale of unintelligibility.
Listening to Germany’s highest court may be one of the few occasions when my law PhD actually comes in handy. As I noticed how President Vosskuhle’s reasoning had lost my mother who, apart from the legal jargon, understands German perfectly well, I also wondered how well international correspondents reporting the verdict could have understood it. I doubt most fully understood the ruling.
What most international observers concluded was that the court had rubber-stamped the ESM and the EU’s Fiscal Compact and that the attached conditions were barely worth mentioning. My own reading is rather different. To be clear, the court did not block Chancellor Merkel’s policies. But its demands for clarifications and assurances, and not least its side remarks, signal that doubts remain over Germany’s continued participation in the euro rescue efforts.
The court’s logic starts with the realisation of its own position in German politics. The judges made it abundantly clear that they do not see themselves as policymakers. They refused to be drawn into any kind of discussion whether the euro rescue measures make economic sense, are too expensive or lead to increased inflation. “None of our business”, the red-robed judges effectively said. Euro rescue measures were complicated, there were no certainties about outcomes, and these were not legal questions in any case, President Vosskule argued. It was for elected policymakers to deal with these issues – politicians who are accountable to the electorate and not to judges.
So what was the role of the Constitutional Court, then? Simply to make sure that any euro crisis decisions taken are compatible with the constitution in general and with its democratic principles in particular. First and foremost among these democratic principles are parliament’s budget rights. No democracy can work if parliamentarians had no control over taxes and expenditures, and thus the Bundestag could not divest itself of this core right of fiscal autonomy, the court stated.
Along with this, the judges demanded clarifications in the course of ratifying the European treaties. When signing them, the German President as head of state should seek assurances that the total sum of Germany’s exposure would be limited to €190 billion and that notwithstanding the legal immunity granted to the ESM and its organs, both chambers of the German parliament will be regularly informed about the ESM’s actions.
The first condition is crucial. Before this clarification, there were interpretations that the ESM would be able to unilaterally increase Germany’s liabilities. If, for example, Italy needed help under the ESM, the remaining ESM members could have shouldered Italy’s burden according to their share of the fund’s subscribed capital. Another possible case would have been an extension of the ESM’s capital, which would have also increased Germany’s guarantees beyond the €190 billion mark.
None of this is possible after the court’s ruling. Every single euro above the limit agreed by Germany must be approved by parliament. The Bundestag cannot be bypassed by the ESM or surprised by its decisions. It has to approve every extension of its initially granted guarantees.
This is not a technicality. It is a fundamentally different mechanism than the one the EU had sought to establish. Whereas under the initial plans, the ESM could have more easily demanded more money from national governments, parliamentary majorities now have to be found for any new bailout round. With the appetite for such policies quickly diminishing, this is a potential game changer.
The judges also reflected on the question of whether the international law nature of these new treaties would lock Germany indefinitely into whatever the ESM might do in the future. Not so, says the court.
As Germany now enters the ESM with the understanding that its liability was limited and parliament would be consulted by its officials, then this is what Germany can reasonably expect from the ESM in future. If, however, it turns that these assurances were not kept, then Germany would have every right to withdraw from the ESM – even though the ESM treaty does not specify an exit procedure.
The Constitutional Court has thus delivered a ‘Yes, but’ verdict – with the ‘but’ more interesting than the preceding ‘yes’. Not only does it impose a hard budget constraint on the ESM; it even makes it possible for Germany to leave the ESM unilaterally at any time in the future when it declares its conditions are no longer met.
As if these big qualifications were not serious enough, the court, almost in passing, declared that it would analyse the legality of the ECB’s bond purchases in the near future. This was not what the court had to decide last week but regardless the judges expressed their doubts that Mario Draghi’s monetary activism was allowed under European law. It was a shot across the bow to the European Central Bank.
Going through the judgment it is hard not to be struck by the contrast between what the media thought the court had decided and what it actually said. There is no blank cheque in the decision but lots of qualifications, demands for assurances and legal opinions on the legality of the euro rescue policies.
No, Germany’s highest court did not provide its unqualified seal of approval to the ESM, the Fiscal Compact let alone the ECB’s monetary activism. What it actually did was create enough loopholes for a future German government to pull Germany out of the eurozone.