Europe and the world are
eagerly awaiting the decision of Germany’s Constitutional Court on September 12
regarding the European Stability Mechanism (ESM), the proposed permanent
successor to the eurozone’s current emergency lender, the European Financial
Stability Mechanism. The Court must rule on German plaintiffs’ claim that
legislation to establish the ESM would violate Germany’s Grundgesetz (Basic Law).
If the Court rules in the plaintiffs’ favor, it will ask Germany’s president
not to sign the ESM treaty, which has already been ratified by Germany’s
Bundestag (parliament).
There
are serious concerns on all sides about the pending decision. Investors are worried that
the Court could oppose the ESM such that they would have to bear the losses
from their bad investments. Taxpayers and pensioners in European countries that
still have solid economies are worried that the Court could pave the way for
socialization of eurozone debt, saddling them with the burden of these same
investors’ losses.
The
plaintiffs represent the entire political spectrum, including the Left Party,
the Christian Social Union MP Peter Gauweiler, and the justice minister in
former Chancellor Gerhard Schröder’s Social Democratic government, Herta
Däubler-Gmelin, who has collected tens of thousands of signatures supporting
her case. There is also a group of retired professors of economics and law, and
another of “ordinary” citizens, whose individual complaints have been selected
as examples by the Court.
The
plaintiffs have raised several objections to the ESM.
First,
they claim that it breaches the Maastricht Treaty’s “no bail-out” clause
(Article 125). Germany agreed to relinquish
the Deutsche Mark on the condition that the new currency area would not lead to
direct or indirect socialization of its members’ debt, thus precluding any
financial assistance from EU funds for states facing bankruptcy. Indeed, the
new currency was conceived as a unit of account for economic exchange that
would not have any wealth implications at all.
The
plaintiffs argue that, in the case of Greece, breaching
Article 125 required proof that its insolvency would pose a greater danger than
anticipated when the Maastricht Treaty was drafted. However, no such proof was
provided.
Second,
Germany’s law on the introduction of the ESM obliges Germany’s representative
on the ESM Council to vote only after having asked the Bundestag for a
decision. According to the plaintiffs, this is not permissible under
international law. If Germany had wished to
constrain its governor’s authority in this way, it should have informed the
other signatory states prior to doing so. On the other hand, Germany’s
representative on the Governing Council is sworn to secrecy, which, the
plaintiffs argue, precludes any accountability to the Bundestag.
Moreover,
the plaintiffs claim that, while the ESM treaty is restrictive in granting
resources to individual states, requiring a qualified majority vote, it does
not specify the conditions under which losses are acceptable. Losses can result
from excessive wages paid by the ESM Governing Council members to themselves, a
dearth of energy in efforts to collect debts from countries that have received
credit, or other forms of mismanagement. And, because Governing Council and
Executive Board members enjoy immunity from criminal prosecution, misbehavior
cannot be punished.
If
losses arise, they must be covered by the initial cash contribution of €80
billion ($100 billion), which then would be topped up automatically by all
participating countries according to their capital shares. If individual
countries are no longer able to make the necessary contributions, others must
do so on their behalf. In principle, a single country might have to assume the
entire burden of losses. Such joint and several liability, the plaintiffs
assert, contradicts the Court’s previous statements that Germany should not
accept any financial commitments stemming from other states’ behavior.
Worse,
according to the plaintiffs, although the liability of any country vis-à-vis
external partners is limited to that country’s share of capital, this
limitation does not apply to other signatory states. It is theoretically
possible that a single country could be held liable for the ESM’s total
exposure of €700 billion.
Finally,
the ESM cannot be considered on its own, but must be seen in the context of the
total exposure amount, which includes the €1.4 trillion in bailout funds that
have already been granted. In particular, the Target2
credit drawn by the crisis-afflicted countries’ central banks, which already
totals almost €1 trillion, should also be taken into consideration.
Nobody
knows how the Constitutional Court will rule on these objections. Most
observers believe that the Court is unlikely to oppose the ESM treaty, though
many expect the judges to demand certain amendments, or to ask Germany’s
president to make his signature subject to certain qualifications.
It
is good that the Court’s decisions cannot be forecast, and even better that the
Court cannot be lobbied or petitioned. The European Union can be based only on
the rule of law. If those in power can break its rules on a case-by-case basis,
the EU will never develop into the stable construct that is a prerequisite for
peace and prosperity.
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