By Chris Cermak
FRANKFURT (MNI) – The German Constitutional Court is widely
expected to sign off Wednesday on the country’s participation in
Europe’s new bailout fund, the European Stability Mechanism (ESM), and
on the “fiscal compact,” which significantly tightens collective
enforcement of EU budget rules by requiring that they be enshrined in
national statutes.
Even while allowing the ESM and the fiscal compact to move forward,
the judges could impose limits on German liabilities or even include a
broader warning that government officials in Berlin are nearing the
limit of what they can commit to under Germany’s existing constitution.
Technically, Wednesday’s ruling will not be on the ESM and fiscal
compact per se, but on whether to grant temporary injunctions against
their ratification until the court has completed a full review of the
lawsuits brought against them by Germans who fear that their country is
over-extending itself on behalf of its poorer European partners. The
full review is not expected until sometime in 2013.
Most constitutional experts think it is unlikely the high court’s
eight-member panel will halt German ratification of this year’s two
signature European reforms. Such a move would be politically charged and
would almost certainly propagate new waves of turmoil in financial
markets. Nonetheless, some analysts believe there is a non-negligible
risk that the court could upset expectations.
The eight-judge panel of the court, in the German city of
Karlsruhe, is scheduled to issue its ruling shortly after 0800 GMT/0400
ET tomorrow. It has already taken three months to deliberate on the
injunction petitions, which were filed shortly after Germany’s lower
house of Parliament, the Bundestag, approved the ESM and the fiscal
compact by a two-thirds majority in late June.
If the court rejects the injunction requests, it will allow German
President Joachim Gauck to sign the ratification legislation, which
means the ESM would enter into force immediately. Germany is the only
major Eurozone member that has yet to ratify the treaty creating the new
bailout fund.
The court’s ruling, particularly on the ESM, is a crucial hurdle
for European leaders in their three-year struggle to confront the debt
crisis. The new bailout fund, intended to replace the temporary European
Financial Stability Facility (EFSF), adds E500 billion to
crisis-fighting efforts and is the heart of the so-called “firewall”
erected by Eurozone governments to protect countries like Spain and
Italy from the ever-looming threats of unsettled financial markets.
The ESM is also key for the new bond buying program announced last
Thursday by the European Central Bank. That’s because the ECB insists
that before it will buy any sovereign debt in the secondary market, the
beneficiary country must first sign up for an aid deal with the bailout
fund, and the fund itself must be prepared to buy bonds at auction.
Germany is the biggest financial contributor to the ESM. The EFSF alone,
which already has significant outstanding commitments, would have a more
limited capacity to participate in the ECB plan.
There had been reports that the ECB might wait for the decision
from Karlsruhe before unveiling its new bond-buying plan. But ECB
President Mario Draghi put those fears to rest Thursday by spelling out
the details of the program and insisting that the court case had no
effect on the ECB’s decision making.
Draghi’s announcement Thursday prompted a last-minute petition to
delay the German court’s decision, arguing that the ESM should not be
ratified unless the withdraws its bond-buying plan, which is unpopular
in Germany. The petition was rejected by the court Tuesday.
A court-ordered injunction in the case of the fiscal compact would
probably be less traumatic, especially for financial markets, but it
would be highly ironic, since German Chancellor Angela Merkel was the
strongest proponent of the compact in meetings of European leaders late
last year and in early 2012.
Though most financial analysts are counting on the court to give
the ESM and fiscal compact a green light, some – including those at UBS
and Morgan Stanley – believe the market is not adequately pricing in the
risk of a verdict to the contrary.
One reason for the court’s unusually long three-month deliberation
period on the injunction requests is its recognition that any signal it
sends in this preliminary ruling will be viewed as tantamount to a final
decision.
Friedrich Heinemann of Germany’s economic research institute ZEW
said earlier this month that he expects the preliminary ruling to
reflect the final verdict. In other words, a green light on Wednesday
should put to rest doubts about whether the ESM can go forward.
But that leaves the question of just how specific the court will be
in tomorrow’s ruling, and what if anything it might hold over to be
decided during the main proceedings and final decision expected next
year.
Franz Mayer, a constitutional law professor at the University of
Bielefeld in Germany, says this could depend in part on whether or not
the court wants to “keep itself in the game” in the European integration
debate going forward.
In other words, the court could “remain on stand-by, so that if
certain things…used as a basis for deciding on the injunctions do not
materialize, they can return to it again,” Mayer said.
At the same time, however, Mayer notes that the three-months the
court has already taken suggests the judges are keenly aware of the need
to remove the nagging uncertainty that has been hanging over the ESM and
fiscal compact.
At the very least, the court is almost certain to reaffirm its
stance that the Bundestag must maintain control over fiscal policy. Some
constitutional law experts have suggested that the judges could require
a kind of “formal reservation” to be attached to the ESM ratification,
perhaps seeking to limit any automatic additional financial liabilities
for Germany.
“There is, at the very least, a real risk that the Court will only
approve the constitutionality of these treaties subject to certain
conditions and limitations with regard to Germany’s exposure,” Paul
Gallagher, Ireland’s former attorney general, wrote in a research paper
earlier this month. “Whether these limitations and conditions will be
consistent with the objectives of these treaties is difficult to
predict.”
In a series of decisions over the years, the Constitutional Court
has a clear track record of insisting that Germany’s parliament be
involved in the European decision-making process.
The argument brought this time by opponents of the ESM is that
Germany’s potential liabilities under it are so large that the Bundestag
could lose its ability to steer fiscal policy independently.
The key argument involves whether Germany could be forced to pay
more than its current E190 billion liability to the ESM if, for example,
other countries reneged on their payments. Opponents argue that Germany
could, in an extreme case, be obliged to bear the entire E700 billion
bill — the combined lending capacity of the EFSF and ESM — in order to
safeguard Europe’s financial stability.
Although the sums at stake are larger now, Mayer argues that
because the court backed the EFSF rescue fund in 2011, it is extremely
unlikely to find the ESM unconstitutional. The construction and concepts
behind the two rescue packages are “essentially the same fundamental
idea,” he observes.
But even if the court allows the ESM to go forward, it seems
increasingly likely that a popular referendum on further European
integration will ultimately be required, assuming plans for a banking
union, a fiscal union, and a political union move forward.
The court has a track record of issuing declarations that go well
beyond the parameters of the case before it, which is something to watch
for on Wednesday. Judges have already suggested in previous rulings that
Germany will run out of room to delegate more powers to European
institutions at some point without making more fundamental changes to
its constitution.
–Frankfurt bureau, +49-69-720-142; ccermak@mni-news.com
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