As the month of August inexorably ticks away, investors and policymakers are getting ready for a hot September. In the coming weeks, Chancellor Angela Merkel will meet with the French President Francois Hollande and the Prime Ministers of Italy, Spain and Greece. They will debate whether or not Greece should be granted more leniency in achieving its fiscal objectives, i.e, slowing down the pace of the budget cuts it has promised to implement. Even more importantly, they will discuss whether Spain should activate the permanent bailout fund, the European Stability Mechanism (ESM), by officially asking for its help. Such a request would trigger a massive intervention by the European Central Bank (ECB) on bond markets.
Merkel’s interlocutors will in all likelihood ask the Chancellor what she thinks the German Constitutional Court in Karlsruhe might decide on September 12th. In fact, that date is quickly turning into a make or break moment for the euro zone. If the court decides that the ESM cannot be ratified by Germany, the rescue fund would not have the financial means to do its job. Things in the euro zone could quickly unravel. Speculative attacks on Spain and Italy would quickly follow, pushing up yields for their sovereign bonds to unsustainable levels. Even France could come under fire.
Of course, not even Angela Merkel knows what the court in Karlsruhe will decide. But German government officials seem pretty confident that the court will allow the ESM treaty to become operational soon after September12th. Is their confidence misplaced? It does not appear to be so for a number of reasons.
Both the fiscal compact and the ESM treaty were ratified by the German Bundestag with a constitutional majority. This means that the legislative branch, which has the power to amend the constitution with a two thirds majority, wanted to make sure that the will of the parliament would trump concerns about the constitutional legality of its actions. The fact that the court took the ESM case is not in itself an indication of its will to strike down the law. According to its former Chief Justice Hans-Juergen Papier, the court is well aware of its limits. In a recent interview with the German daily Die Welt, he argues that “Karlsruhe knows that in vital political questions (“Schicksalsfragen”), the court does not necessary have the final word. (…) It is not tasked with operative policymaking. The Court cannot replace the legislator or act as the supreme organ of the state.”
That said, the court has a strong track record of being euro skeptic. It questions the democratic legitimacy of closer European integration, and has even voiced concern about the power of the European parliament, an institution which does not follow the principle of “one man, one vote”. Critics of the German court have pointed out that full compliance with such a principle at a European level would have absurd results. For example, taking EU member Luxemburg as a parameter, with its roughly 500,000 citizens and 50 representatives in the European Parliament, that body, representing a total of about 500 million citizens, would need to have 6,000 members. This is clearly not a practical proposition. Furthermore, with such a narrow interpretation of democratic legitimacy, even the United States Senate would not pass the test. Every state, regardless of its size and the number of voters, sends only two senators to Washington DC.
The repeated intervention by the German court in crucial EU matters has complicated the rescue of the euro zone. It has narrowed the policy options for Merkel and has triggered fierce criticism in some member countries. (Media reports claim that Italian Prime Minister Mario Monti rebuffed Merkel’ s reminders of the limits set by the court in Karlsruhe, with the sarcastic remark: “We have a constitutional court in Italy, too, you know?”)
According to German government officials, the most likely outcome of the ruling next month will be to allow the ESM to operate, albeit with a renewed warning to legislators about any further transfers of power from Berlin to Brussels.
However, the immediate impact of the ruling on the role of the ESM in this crisis will be negligible. Ultimately, in the ECB President’s rescue plan, the ESM’s main role is to provide the legal and political cover for the central bank to mount a massive intervention on bond markets and cap yields for Spanish and possibly Italian bonds. Given its limited financial resources, it is unrealistic to expect the ESM to be the driving force behind any rescue operation aimed at Spain and Italy.
The ruling in Karlsruhe may also lead to another, less obvious but crucially important outcome. By forcing the political leadership in Berlin to have a frank debate with its citizens about the real, inescapable costs of a euro zone rescue, it may push German politicians on both sides of the political spectrum closer to a point of no return. It could become impossible to avoid a referendum on further closer European integration. We have not reached that moment yet, but we are inching closer.
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