We argued in a recent post that the ESM violates Germany’s constitution and the EU treaties. Today the German Constitutional Court (GCC) ruled that the ESM and its ‘fiscal treaty’ on budget discipline do not violate the country’s Basic Law and do not undermine the Bundestag`s sovereignty over budget issues, according to Openeurope. Although the full ruling is expected in early 2013, Openeurope remarks a few aspects of today’s resolution:
- Cap of €190bn on German ESM contribution, which can only be overturned by the Bundestag.
- Both houses of German Parliament need to be adequately informed about all ESM decisions – something which needs to be enshrined in “international law”.
- Reinforced that Bundestag approval needed for all activations of the ESM.
- Explicit ban on ESM borrowing directly from European Central Bank (ECB).
- The German Government can terminate ESM at any time, as recognised under “customary international law”.
- In its full ruling, expected in early 2013, the Court will also consider whether the ECB’s bond-buying programme, the OMT, has transferred illegal degrees of sovereignty to the EU-level.
If respected, #1 ruling would limit some of the potential risks that the creation of the ESM pose to the countries (and ultimately their taxpayers) funding the ESM, most specially Germany. Effective maximum potential financial costs to Germany would be capped at 190 billion Euros, invalidating the articles of the ESM allowing for potentially unlimited liabilities.
#2 and #3 reinforces Bundestag veto over ESM activation: the decision also states that any future ESM bailouts will require parliamentary approval, stating that the Bundestag “must individually approve every large-scale federal aid measure on the international or European Union level”.
#4 bans on the ESM borrowing from the ECB: the Court says that “borrowing by the ESM from the European Central Bank” would be incompatible with EU law (Article 123 TFEU). This is a surprisingly categorical rebuke, especially over an issue of EU rather than German law.
#6 addresses not the ESM but the latest ECB asset purchase program, named Outright Monetary Transactions (OMT). The GCC suggested in its press release that the ECB’s OMT will be considered in its final ruling on these complaints. The exact criteria upon which the programme will be assessed is unclear but broadly the Court will determine whether it transfers additional German sovereignty to the European level above and beyond that which the country has committed itself to in the EU Treaties.
What does it all mean? With a firm cap on the ESM, the ECB is now most certainly the only actor with deep enough pockets to put Spain and Italy on life-support – together with the OMT announcement the ruling has shifted the burden back to the ECB. However, the ruling and the role of the Bundestag highlights that activating the OMT will be challenging, since in order to qualify for ECB bond-buying, a country must first get funding from the ESM – and be subject to conditions. If the Bundestag agrees to activate more bailouts, it will most certainly push for harsher conditions than what debtor countries – most importantly Spain – are willing to accept. In the long-term, under current arrangements of linking ESM and OMT, the latter is also effectively capped and subject to a Bundestag veto.
If this is so, the caveats in the GCC’s resolution are not minor, why did markets continue to rally today? An answer to this question is hinted in today’s Die Welt’s article, Karlsruhe weiß, wo Europas Hammer der Macht hängt, whose last sentence goes like this: “the GCC, that for us is almost as holy as the Bundesbank, is only one of the Players in the european Game, and not the most powerful one” (“Das Bundesverfassungsgericht, das uns fast so heilig ist wie die Deutsche Bundesbank, ist auch nur ein Spieler im europäischen Spiel, und nicht der mächtigste”).
If, from a german perspective, its constitutional court is not the biggest, ultimate player, who is? If, as Die Welt’s article also implies, the GCC takes its decisions not only considering Germany’s Basic Law, but also in the context of the “wirkliche WirklichkeitI”, the “real reality”, what is that reality’s content?. Mr. Thomas Schmid, the author of Die Welt’s article, hints at the European Union’s centralist drive that gradually hollows national sovereignty and places it in supranational bodies, most specially the ECB, Mario Draghi’s ECB, that does no longer fear to antagonize its most important member, the Bundesbank. The ECB, that is also supposed to be the supervisor of ALL european banks, according to the latest proposal of the European Commission (EC), emerges as an almost all-powerful institution, mostly unaccountable to national governments and not even to the European Union. What and who does the ECB stand for?. Certainly not monetary orthodoxy and price stability as is written in its charter. In whose hands does Germany’s sovereignty lay? Perhaps a review of Mr. Mario Draghi’s biography would be helpful in answering this question.