German Finance Minister Wolfgang Schaeuble told students last week he was confident the country’s role in the European Stability Mechanism would be approved by its highest court. Morgan Stanley’s Elga Bartsch says there is a 40 percent chance he is wrong.
The Federal Constitutional Court, scheduled to rule tomorrow in Karlsruhe on whether Germany may ratify the ESM, is the final hurdle for the 500 billion-euro ($640 billion) plan to rescue indebted euro-area member states.
“Europe won’t collapse on Sept. 12,” Franz Mayer, a law professor at Bielefeld University, said in an interview. “In the end, the court will allow Germany to ratify the ESM, but there will probably be some strings attached.”
Germany is the only country that hasn’t ratified the ESM treaty and if it can’t join, the mechanism won’t be created and other bailout measures might be thrown into doubt. Last week, European Central Bank President Mario Draghi announced the ECB was ready to buy unlimited quantities of short-dated government bonds of nations signed up to rescues from the ESM or the temporary European Financial Stability Facility the ESM is designed to replace.
The ECB’s Sept. 6 announcement prompted Peter Gauweiler, a German lawmaker who is one of the plaintiffs in the suit, to ask the court in an emergency bid to stop the government from signing the ESM unless the ECB repeals that decision. The judges should at least delay tomorrow’s ruling if they cannot take such a decision until then, Gauweiler argued.
The Constitutional Court said yesterday it is reviewing the bid and will announce today how to handle the motion. Even after Gauweiler’s latest attempt, the government remained confident that court will approve the ESM.
“We remain convinced of the ESM’s constitutionality,” Steffen Seibert, Chancellor Angela Merkel’s chief spokesman, told a regular government press conference in Berlin today. “We feel good as we approach Wednesday and hope that the court will see it the same way.”
Schaeuble, a lawyer by training, told students in Strasbourg on Sept. 3 he sees “no constitutional issues” with the ESM. Morgan Stanley’s Bartsch sent her research to clients last month. It was one of dozens of notes analysts issued in advance of the ruling.
So far, the court has cleared each step of European integration. Last year, the judges cleared the Greek bailout and the EFSF, while saying Germany may not agree to take over unlimited future liabilities incurred by other EU member states.
“The bigger issue than the actual ruling is what extra language the court will add to the reasoning where it may comment on where the limits are in the future,” said Mayer. “The markets seem to be quite afraid the judges may spoil certain options for the future, like collectivization of debt within the euro zone.”
The new cases were filed after German lawmakers approved the ESM and the Fiscal Pact, a treaty designed to impose budget discipline on EU member states. About 37,000 people signed up to endorse a constitutional complaint filed by political group “Mehr Demokratie e.V.” Other plaintiffs include opposition party Die Linke as well as Gauweiler, a conservative lawmaker from Merkel’s Christian Democratic bloc.
The court has chosen six cases for tomorrow’s ruling. At this stage, the judges only have to decide whether to halt ratification of the treaties while reviewing the suits more closely.
In the Greek bailout and the EFSF cases, the court took only hours or days to reject preliminary bids, while taking more than a year to decide on the overall legal issues.
In the ESM cases the judges held a one-day hearing in July for the preliminary bid and took two months to deliberate. The extended time period indicates the court may try to tackle most legal issues at once, said Axel Kaemmerer, a professor at Bucerius Law School in Hamburg.
“The judges will have to address the key question to what extent Germany does relinquish its financial autonomy, how much power is left to decide on financial actions it will have to take in the future,” Kaemmerer said.
The plaintiffs argue the treaties undermine the autonomy of Germany’s parliament and democratic self-rule. They rely on last year’s top court ruling which, while clearing the rescue measures in place at the time, said parliamentary decisions about taxing and spending are a central part of self-government. Members of parliament are representatives of the people and must remain in control of “elementary” budgetary decisions, the judges said.
Last week’s ECB bond buying announcement is unlikely to change the court’s decision because it’s likely the judgment has been drafted, Mayer said. The judges may address the issue in the written judgment. Previous ECB bond purchases were discussed in earlier cases, which didn’t lead the court to rule against bailout measures, Mayer said.
The ESM requires its members to shoulder the burden of nations that don’t pay their share. Those rules could be critical issues in tomorrow’s ruling, according to Kaemmerer.
“That’s a vulnerable flank,” he said. “There’s a risk that the court will find those rules don’t concretely specify what Germany has to pay in the end.”
Like Mayer, Kaemmerer thinks the court will approve ratification and address problems by requiring the government to take additional steps. This could include ordering the government to spell out how it interprets critical clauses, he said.
Some plaintiffs, including “Mehr Demokratie e.V.” and Die Linke, have argued the court must order Germany to make a legally binding pledge that it may terminate the fiscal pact. They say the pact’s debt limits go beyond what the nation’s constitution requires and unduly limits political leeway.
Allowing termination of the fiscal pact would risk “turning it into a mockery,” said Mayer, who represented the Bundestag, the lower house of parliament, in last year’s bailout case.
Because the ESM and the Fiscal Pact are changing the principles of government, the plaintiffs argue they could only be approved by a referendum. Both Mayer and Kaemmerer don’t expect the tribunal to heed that claim.