Thursday, September 08, 2011

The Karlsruhe factor II

In case you missed it, here's our reponse to yesterday's ruling by the German Consitutional Court (for those of you up for the challenge, the full ruling can be found in German here):

Open Europe has today responded to the German Constitutional Court ruling against the claims that the eurozone bailouts are illegal. As expected, the Court ruled that the eurozone bailouts are compatible with German Basic Law, since, according to the Court, they do not provide an excessive burden on the German budget, do not constitute a significant transfer of power away from the Bundestag nor impact negatively on the euro’s purchasing power, as had been suggested by the claimants. However, the Court also gave the Bundestag’s Budget Committee an effective veto over future activation of the eurozone’s bailout fund, the EFSF, and reinforced German constitutional restrictions on the introduction of Eurobonds.

Open Europe Economic Analyst Raoul Ruparel said,

“Giving the Bundestag’s Budget Committee the final say over the use of the bailout fund is welcome from a democratic point of view, but will add another element of uncertainty to the eurozone crisis. However, so far the Budget Committee has consistently taken the government line on the bailout, albeit reluctantly, and it remains to be seen whether it dares to exercise its new power. The calls for the whole Bundestag to have a greater say in the dispersion of financial aid are, therefore, likely to continue.”

“The ruling also seems to further entrench the German government position that Eurobonds are a no-go, by warning that Germany should not assume other countries’ liabilities. However, the wording used by the Court also seems to suggest that joint debt in the eurozone could be constitutionally allowed if it involved a stronger German say over other member states’ fiscal policies. This could set Europe up for a major clash of national democracies in future, should Eurobonds be deemed necessary to hold the Single Currency together in the long term.”

“Controversially, the Court did not give an opinion on the legality of the ECB’s bond purchase programme – despite the potential implications this programme has on price stability and the ECB’s independence. This unsettling question is likely to resurface in future.”

What did the Court say?

Although finding the complaints non-substantive, Chief Justice Andreas Vo├čkuhle stressed that the verdict “should not be misinterpreted as a constitutional blank-cheque for further aid-packages”.

The Court also ruled that, in order to conform to the constitution, “the Federal Government is in principle obliged to always obtain prior approval by the [Bundestag] Budget Committee before giving guarantees.” This gives the committee a significant role in the approval of any future use of the EFSF, the eurozone’s bailout fund, a marked change from the current situation where it can only give a non-binding opinion on the issue.

Additionally, the Court also flagged up some red lines over any future mutualisation of debt. The Court’s press release states that, “The Bundestag, as the legislature, is also prohibited from establishing permanent mechanisms under the law of international agreements which result in an assumption of liability for other states’ voluntary decisions, especially if they have consequences whose impact is difficult to calculate.” This seems to suggest that any move towards Eurobonds would be unconstitutional, even with agreement from the Bundestag. However, the phrasing of the statement does also hint that if Germany were to have a greater say over the fiscal policies of other states, where it had assumed a liability, then in fact, it may not be unconstitutional. The full implications of the ruling, however, still remain unclear.

To read Open Europe’s preview briefing on the ruling – which reflects the content of the actual verdict, click here.

1 comment:

Peripatetic Scribe said...

If I may quote from your piece: "However, the wording used by the Court also seems to suggest that joint debt in the eurozone could be constitutionally allowed if it involved a stronger German say over other member states’ fiscal policies." In all honesty, I cannot see any single Eurozone country willingly accept this state. They may be totally bankrupt, but would still prefer their own solution. Is this the death-knell of "ever-closer union".....