lunes, mayo 27, 2024

Eurozone Crisis: All Eyes on Karlsruhe

Eurozone Crisis: All Eyes on Karlsruhe

Michael Waibel is a British Academy Postdoctoral Fellow at the University of Cambridge.

On 7 September 2011, the German Federal Constitutional Court gave judgment in three joined cases regarding the constitutionality of German financial assistance to Greece and of its guarantees to the European Financial Stability Facility (EFSF). The Eurozone rescue efforts are widely seen to stand (or fall) with the government in Berlin. Germany is the largest contributor to the Greek rescue and the EFSF with more than 27 percent, or 119 billion €, of the 440 billion € in guarantees and one of only six AAA-rated sovereigns remaining in the Eurozone (alongside Austria, France, Finland, Luxembourg and the Netherlands).

Financial markets breathed a collective sigh of relief once the court upheld the rescue measures, even though few had expected the Court to strike down the laws authorizing the German guarantees. They had waited for word from Germany’s highest court with a mix of anxiety and hope. The decision removed an important source of uncertainty that had weighted on financial markets over the summer of 2011. At the same time, the judgment also raises several questions with regard to German participation in future rescue efforts, and in particular, how far fiscal integration in the European Union may go without infringing the German constitution.

The threat of constitutional review limited the German government’s room for manoeuvre in the Eurozone crisis, slowed down the policy response and explains some features of the ongoing rescue efforts, such as the structure of the EFSF and the requirement of strict conditionality attached to financial assistance to struggling Eurozone economies. The Constitutional Court has been a central player in the drama surrounding the efforts to resolve the Greek debt crisis. In a telling sign of the court’s importance, Chancellor Merkel postponed her intervention in the general budgetary debate on 7 September in the German Parliament to await the court’s ruling.

The claimants were a group of economists and lawyers known for their scepticism towards European monetary integration. Their constitutional complaint sought to capitalize on widespread anger among the German electorate regarding bailouts of seemingly profligate Eurozone members and a banking system fundamentally resistant to reform. Specifically, they attacked the law authorizing emergency guarantees to safeguard Greek ability to pay of 7 May 2010 (up to 22.4 billion €, not including interest and costs), the law authorizing guarantees for the operation of the EFSF of 22 May 2010 (up to 123 billion €, not including interest and costs), and a range of community and intergovernmental decisions and agreements, including the EFSM regulation of 10 May 2010, the EFSF Framework Agreement of 7 June 2010 and the European Central Bank’s decision to buy bonds on the secondary market through its Securities Purchase Programme, first used for Greece, though extended in 2011 to Portugal, Ireland, Italy and Spain.

In the main, the claimants argued that guarantees of more than half of German annual public spending stripped the German Parliament of its budgetary sovereignty – a constitutive element of a democratic state. Collectively the measures dramatically restricted the spending choices of future parliaments. The Bundestag and its budgetary committee were not given sufficient opportunity to scrutinize the two laws authorizing the guarantees, and were subjected to extreme and inappropriate pressure to approve the guarantees within the shortest possible timeframe. Should Germany be called upon to pay out on the guarantees, extensive additional borrowing would become necessary, increasing German sovereign debt.

Such far-reaching delegation of parliament’s budgetary responsibility violated the constitutional property guarantee, which encapsulated a constitutional guarantee for price stability. The challenged measures would stoke inflation in Germany. They created a comprehensive system of fiscal transfers (“a transfer union”), in breach of the principle that only defined powers may be delegated to supranational institutions. Moreover, they violated the no-bail out clause in Article 125 TFEU and fundamentally upset EMU’s incentives for good fiscal behaviour. Each borrower had to continue to stand on its own feet for financial markets to punish profligate debtors. The Greek debt crisis differed from a natural catastrophe. Greece had to bear the full consequences of its own fiscal irresponsibility, including a potential state insolvency.

The German government and German Parliament attacked the applicants’ attempt to couch general policy concerns in alleged subjective rights as misguided. They were not individually affected, and lacked standing to bring this action on behalf of the public in general. The constitutional property guarantee did not encapsulate a subjective right to a stable currency. The guarantees, limited in scope and duration, were an expression of German sovereignty, which Parliament had approved after due consideration. Parliament retained oversight over implementation. The no bailout clause only precluded mandatory fiscal transfers, without prejudice to voluntary financial assistance on an ad hoc basis. A strict reading of the no bailout clause would have dramatic consequences for EMU and European integration more generally. The requirements for challenging legislative acts adopted at the European level were absent in this case. The executive branch had a wide measure of discretion in how to respond to help other Eurozone countries in financial difficulty. No permanent system of intergovernmental transfers was created. The German government had insisted on strict conditionality in order to return the troubled states to debt sustainability.

The German Central Bank and the European Central Bank intervened as amici curiae. According to the German Bundesbank, the German government’s policy response, whose aim was to give the countries concerned breathing space to adjust and return to sound economic fundamentals, was on the whole reasonable in light of the grave weaknesses of the EU’s stability framework. Nevertheless, taken together the measures did strain fundamental pillars of European Monetary Union, and substantial reform was essential to prevent re-occurrence in the future. A framework for restructuring sovereign debt was needed over the medium term to underpin the non bailout clauses and to maintain appropriate incentives for creditors and borrowing states in EMU. The ECB also gave guarded support to the German government, underscoring the risks of contagion and the threat to financial and price stability in the Euro area as a whole.

The court gave the question whether the purchasing power of money fell within the ambit of the constitutional property guarantee short shrift. In its judgment, the court focused on Parliament’s budgetary powers as one of the essential features of democratic government. The right to vote did not imply a general right for individuals to constitutional scrutiny of parliamentary decisions. Only the part of the complaint in relation to the two laws authorizing the guarantees was admissible. As a general rule, the court could not look into the measures taken at the European level. The narrow exception introduced in Maastricht was limited to cases when constitutionally guaranteed basic rights were rendered meaningless, such as a change to the institutional structure, for instance by way of transfer of additional powers to the European Union. Faithful to its Solange, Maastricht and Lisbon jurisprudence, the court held that core elements of democratic self-determination could not be given up, if they substantially and permanently reduced the influence of citizens on public policy. Scenarios falling short of a dictatorial regime would fail the constitutional test, if the competences of the current and future Parliaments were emptied of all meaning, such that government policy were no longer responsive to the democratically expressed choices of voters.

The authorization of guarantees destined to provide liquidity support to Eurozone countries in financial distress was capable of unconstitutionally restricting the scope for future political action by Parliament. The measures would fail constitutional scrutiny if guarantees could be triggered by conduct of another member state alone and effectively stripped Parliaments of its budgetary prerogative. In the present case, however, the guarantees did not infringe the German Basic Law. Parliament retained the final say over spending decisions. The financial assistance was limited in time and scope, given in pursuit of clear objectives, contingent on policy conditionality and subject to defined modalities for disbursements. Each programme required the unanimous approval of Euro area member states. Against this background, it was acceptable that the law authorizing guarantees for the operation of the EFSF only required that the government try to reach agreement with the Parliament’s budget committee.

The court underscored that Parliament needed to retain sufficient influence over the use of the financial resources pledged to the EFSF. To that end, the Constitution mandated that the requirement to consult be interpreted as a requirement for the Parliament’s budgetary committee to agree in advance. The court struck a sensible compromise between the need for parliamentary approvals and the government’s ability to act decisively to stop market meltdowns. Crucially, the constitutional court indicated that it would generally refrain from substituting its own judgment ex post for executive and legislative decisions in macroeconomic matters, often taken under great time pressure. Though the court did not give carte blanche to the government and the legislature as regards future rescue efforts, it recognized that macroeconomic crisis management was a domain for which the executive bears primary responsibility. The court made it crystal-clear that it will not second-guess complex economic policy judgments, save perhaps in extreme circumstances.

Nevertheless, the requirement for Parliament to agree to financial commitments is not unduly burdensome on the executive and serves as an important check-and-balance. The judgment, in setting out the constitutional requirements for the involvement of Parliament in future rescue efforts, paved the way for German parliamentary approval for legislation to expand the EFSF at the end of September 2011. The revised statute extended the upper bound for guarantees to the EFSF to 211 billion €. Under the new legislation, the German government’s representative in the EFSF must not approve proposals in the EFSF, unless Parliament has approved in advance. Matters that are reserved for Parliament are new EFSF programmes or significant changes thereto, changes that affect the volume of guarantees, changes to the EFSF Framework Agreement and the transition arrangements from the EFSF to the ESM.  When there is urgency or a need for confidentiality, the power to approve may be delegated to select members of the Parliament’s budgetary committee, though the Parliament retains the right to intervene. The budgetary committee also exercises oversight over implementation of EFSF programmes.

Going forward, the first important question is how the Constitutional Court would assess the constitutionality of Eurobonds, and whether such financial instruments could be structured in such a way as to avoid infringing the German constitution. The second question is whether the treaty-based European Stability Mechanism, the permanent successor mechanism from 2013, will run afoul of the need for guarantees to be time-limited. The German Parliament it due to ratify the ESM treaty in first quarter of 2012. While it is unlikely that the court will strike down the ratification on the ground that this mechanism, unlike the EFSF, is permanent, it is harder to see the court accepting ever closer fiscal union, such as a regime of joint and several liability by Eurozone members for their debts. The present decision was 7:1. As the financial commitments for resolving the Eurozone crisis become ever more onerous, the rank of dissenters could well grow. With the crisis moving onto its next stage, the September 7 ruling is unlikely to be the final word from Karlsruhe on the Eurozone crisis.

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European Journal of International Law - Volume 34, Issue 4, November 2023

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