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Germany Rejects Blank Check for Euro’s Fiscal Laggards

By David Henry

So there we have it. Germany's constitutional court has ruled that the president can ratify the treaty on euro-area bailouts. With all the enthusiasm of a bride on her way to an arranged marriage, the country's voters can now be dragged kicking and screaming to help finance the European Stability Mechanism.

But the champagne corks may not be popping in peripheral capitals over the court's decision because the conditions imposed only add to those already in place. Euro members that tap the ESM will have to meet tough budget criteria similar to those demanded by the International Monetary Fund of its aid recipients.  The question now is whether indebted countries are willing to meet those conditions.

European Central Bank President Mario Draghi took the courageous and laudable step last week of offering to buy an unlimited number of bonds in the secondary market as a way to bring down the borrowing costs of troubled euro members. Again, that type of aid would come with strict conditions. Clearly, the ECB and the German constitutional court have now drawn a line in the sand over measures to help Europe's fiscally challenged nations, five of which have already asked for bailouts.

The court was right to require the German parliament to cap the taxpayer's liability at 190 billion euros ($245 billion) when ratifying the ESM Treaty. That figure can rise in theory, but only with the approval of the parliament and the government. This keeps the onus on all countries to balance their budgets and make the structural changes that bond traders need to see before they help lower borrowing costs for euro members. Only then can the euro become a stable currency. Germany, like the ECB, is prepared to meet other euro nations halfway, but solidarity becomes a one-way street when aid isn't reciprocated with commensurate deeds.

The German parliament, the Bundestag, is elected to act in the interest of the people. As in other representative democracies, it is expected to reflect the will of the electorate. For this reason, a German referendum on the euro is unnecessary. It may also be time-consuming in practice since the constitution doesn't foresee referenda. Postwar Germany has never held a referendum at the national level.

In any event, the Bundestag was today entrusted to limit Germany's liability for the euro project. As long as members of parliament are elected by the public, it won't sell the family silver to pay the debts of other nations.

(David Henry is a Frankfurt-based editor for Bloomberg View.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Sep/12/2012 15:32 GMT

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