Germany's Constitution Court today (12 September) rejected efforts to block the European Stability Mechanism – the eurozone's €500-billion bailout fund – paving the way for the country's ratification of the fiscal compact.
The ESM is seen as central to solving the euro crisis. Its proponents believe that it would give the European Central Bank (ECB) the muscle to buy Italian and Spanish debt. This in turn would allow them to bring down their borrowing costs. ECB chief Mario Draghi said that the ESM was needed to buy the debt of troubled countries.
In rejecting injunction requests from 37,000 plaintiffs, the court said that ratification of the ESM could go ahead with the "proviso" that German liability be limited to €190 billion, as agreed in the ESM treaty.
The plaintiffs, including eurosceptics from Chancellor Angela Merkel's ruling centre-right coalition and hardliners from the left-wing party, Die Linke, had argued that the treaties exposed Germany to unlimited financial liability and ceded too much sovereignty to European authorities.
The court also requested guarantees that there would be no increase in German financial exposure to the bailout without previous approval from both houses of the German parliament, rejecting a confidentiality clause in the treaty.
“My first reaction would be that this probably cannot be done by just agreeing in the German implementation law that the conditions are met,” said Guntram Wolff of the Brussels-based think tank Bruegel. “It may require changes in the ESM treaty or a new side treaty to the ESM.”
German critics argued that the German liability was not limited to €190 billion as had been explicitly stated, but could be higher if the issue price of the authorised capital stock is increased.
“My suspicion is that it will significantly delay the implementation of the ESM,” added Wolff in his blog.
Other analysts, however, believe that the court has reached the best decision possible for the ESM. “It contains no nasty surprises but merely strengthens the role of the Bundestag,” said Sony Kapoor, director of the Re-Define economic think tank.
Kapoor said that the decision had no implications for the ECB, or its possible interventions in the bond market. It did not preclude the possibility of the ESM being granted a banking licence at some future date either, he said.
However, the ESM remains inadequate in size and has a cumbersome decision-making process that gives Germany, France and Italy a de-facto veto on some critical decisions, he added.
Irrespective of the strings attached to the court ruling and the cautious welcome of some analysts, the news was welcomed by markets, with the euro hitting a new four-month high against the dollar – $1.29.
When it comes into effect, the ESM will provide a €700-billion firewall against the spread of the three-year-old debt crisis. Germany is the only country which still needs to ratify the arrangement, but the court’s decision clears the way for the country's president, Joachim Gauck, to sign the ESM into law.
The president of the group of eurozone finance ministers, Jean-Claude Juncker, reportedly said that the ESM could start working from 8 October.
Sigh of relief
European Parliament leader Martin Schulz announced the news to MEPs during the State of the Union address by European Commission President José Manuel Barroso in Strasbourg. The Court’s decision was greeted with thunderous applause and evident relief on the face of political leaders.
German leaders also expressed relief at the court’s decision. Foreign Minister Guido Westerwelle from the liberal FDP said the court ruling was a wise decision, echoing the German constitution’s pro-European spirit.
"The limitation of Germany's liability within the ESM was necessary. Germany's capability should not get worn out," he added.
"Finally the ESM can start working and support the process of stabilisation during the euro crisis,” said Frank-Walter Steinmeier, leader of the Social Democrats in the Bundestag.
The president of the European Parliament, Martin Schulz, tweeted: "German court ruling on ESM good for Europe and for the euro, but confirms [confirmations] needed for parliamentary control on common decisions." He added in another tweet: "More Europe with less parliament impossible."
German Chancellor Angela Merkel said to lawmakers in Berlin that the German constitutional court ruling meant it was a "good day for Germany and a good day for Europe". She went on to say: "Germany sent today again a strong signal to Europe and beyond that it will decisively should its responsibility as Europe's biggest economy and reliable partner," also suggesting that the ruling could restore confidence in the eurozone.
Gregor Gysi, leader of Die Linke (the Left party) in the Bundestag, also expressed satisfaction with the court ruling, although his party was one of the plaintiffs asking the Constitutional Court to stop the ratification of the ESM and the fiscal compact.
Alexander Graf Lambsdorff, vice president of the Alliance of Liberals and Democrats for Europe (ALDE) and leader of the Free Democratic Party delegation, said:
"Today's decision of the Constitutional Court is an important cornerstone for finding an end to the debt crisis. It shows that the ESM as well as the fiscal pact are based on a solid democratic and juridical foundation. The ESM must now become operational as soon as possible. The judges have confirmed the pro-European direction which is already embedded in Germany's basic law."
Alexander Alvaro, vice president of the European Parliament and also a member of the ALDE continued:
"I very much welcome the court decision. The stabilisation of the Euro is unthinkable without Germany, now we can, in close cooperation with our partners, work on the solution of the problems - this is a good signal for Europe."
French MEP from ALDE Sylvie Goulard added: "I am satisfied with the court decision. It is very important for the eurozone member states to be able to continue their work. In the future the accountability of the ESM that is not yet an EU institution should be increased through democratic accountability and scrutiny of the Court of Auditors."
"We will also have to rethink how the admirably high level of constitutional and parliamentary control in Germany may be transferred to the European level, and thus avoid a system in which we could face contradictory views of constitutional courts within the EU on fundamental issues," she said.
The Chairman of the European People's Party (EPP), Joseph Daul, has also welcomed today's decision of the German Constitutional Court. Daul said:
"Today's decision is crucial for the future of Europe. The European Stability Mechanism is our firewall against the crisis." "It is good that the democratic accountability of the European Stability Mechanism is being taken care of. Parliaments must be involved. The same goes for the European level. The European Parliament must be involved in the governance of the Euro. This is also why we need a real political Europe. A Europe where the European Parliament is the only direct representative of the citizens of Europe," Daul added.
Holger Schmeiding, chief economist at Germany's Berenberg Bank, said in a note to clients that the ruling was "another big step towards defusing the euro crisis", adding that a "gradual return of confidence could enable the German economy to rebound by the end of the year from its current stagnation and the eurozone to star expanding gradually in early 2013."
But eurosceptic think-tank Open Europe said in a statement the ruling could make "topping up the ESM more difficult" and that the current lending cap of the ESM "could prove a real obstacle for large-scale eurozone bailouts down the line." The statement also said that the fact that the treaty on the ESM may have to be rewritten, to accommodate the German government, could mean delays to the ESM coming into force.
German public opinion has been broadly hostile to bailing out troubled eurozone countries and opposed to raising the firepower of the bloc's permanent rescue fund, the European Stability Mechanism (ESM).
Germany is the biggest contributor to the ESM, which is funded by taxpayers' money.
In exchange for Germany's solidarity with troubled eurozone member states, German Chancellor Angela Merkel insisted on a new European treaty to tighten fiscal discipline in the eurozone and deepen economic integration as a way to address the bloc's sovereign debt crisis.
- German Constitutional Court: Decision of the court (12 Sept. 2012)
- German Constitutional Court: Extracts from the decision of the Federal Constitutional Court
- Bruegel: ESM? Ja, aber ... By Gunram B. Wolff