18 March 2014

German Constitutional Court: ESM and fiscal compact ruled constitutional

Partially translated from the German

In its September 2012, decision the Constitutional Court had previously confirmed in principle that the ESM Treaty’s transposition into national law was in line with the constitution. In order to address the Court’s concerns regarding an accompanying law to the ESM Treaty and its constitutionality, the German government clarified that the country’s liabilities stemming from the ESM Treaty would be limited to €190 billion. Additionally the government made it clear that the ESM Treaty will not stand in the way of Bundestag’s and Bundesrat’s (lower and upper house of the German parliament) entitlement to comprehensive involvement on ESM issues. The ruling of the German Constitutional Court fully confirms this line. The Court has dismissed the complaints and lawsuits against the setting up of the ESM, the Fiscal Pact and the national implementation and accompanying laws. In the Court’s view the constitutional requirements are observed and sufficiently implemented from a budgetary point of view.

The official verdict states:

"The constitutional complaints and the "Organstreit" proceedings lodged against the establishment of the European Stability Mechanism (ESM), the Fiscal Compact and the national Acts of Assent and accompanying legislation, against the Act approving Art. 136 sec. 3 TFEU, the TARGET2 system, and the so-called Six-pack are partly inadmissible and for the remainder unfounded. This was decided by the Second Senate of the Federal Constitutional Court. Despite the liabilities assumed, the budgetary autonomy of the German Bundestag is sufficiently safeguarded. However, arrangements under budgetary law must be made to ensure that possible capital calls pursuant to the ESM Treaty can be met fully and in time within the agreed-upon upper limits, so that a suspension of Germany's voting rights in the ESM bodies is reliably excluded."

Full press release

Deutsche Welle reports that the lawsuit against the ESM was the largest constitutional complaint in German history: In June 2012, several professors and legislators, joined by more than 37,000 private citizens, filed suit against the European Stability Mechanism (ESM) before Germany's Federal Constitutional Court. Specifically, the plaintiffs fear that the ESM - with its current lending volume of €500 billion - could be automatically extended in an emergency, undercutting the German parliament's constitutional right to approve or reject all budgetary decisions that affect Germany.

Germany's highest court ruled differently, arguing that the German parliament remained the relevant authority because of an ESM law which was passed parallel to the ESM treaty. The constitutional justices handed down one of their typical 'yes, but' verdicts on matters of European integration: Yes, the ESM was constitutional, but only under the condition that Germany's liability be limited to €190 billion and that any further liabilites had to be approved by parliament.

The decision was to be expected, writes the Handelsblatt, because in September 2012 the judges had already cleared the way to Germany's participation in the ESM in an accelerated procedure, yet left it subject to conditions. The court affirmed that from the absolute amount of payment obligations of currently €190 billion, no impairment of budgetary responsibility of the Bundestag could be inferred. However, the Bundestag had to remain the institution with sole responsibility of income and expenditure, including with regard to international and European obligations, the court's opinion added. Foreseeable payment obligations were also to be considered in the annual budget preparation. Süddeutsche Zeitung quoted chief judge Andreas Voßkuhle, who stressed that the Federal Government had to ensure in budgetary terms that Germany could provide funds for the ESM within seven days, if necessary. If the payment were to be delayed longer, Germany would lose the right to vote in the ESM Council - and that would be unconstitutional. The GCC did not state an absolute upper limit of German obligations.

Reactions/comments

Klaus Regling, Managing Director of the European Stability Mechanism (ESM), welcomed the ruling of the German Constitutional Court. "The decision of the German Constitutional Court is good for Europe and for Germany", he said. "The Court confirms its preliminary ruling of September 2012 and this decision provides clarity."
 
He added: "By creating the ESM the euro area countries have established a permanent crisis mechanism for the currency union. The ESM can grant euro area Member States temporary loans in exchange for strict conditionality to reform and consolidate, provided the stability of the euro area as a whole or of one Member State is endangered. The successful programme exits of Spain and Ireland at the end of 2013, the progress in the other programme countries and the economic recovery of the whole euro area show that this strategy is working."

Press release

German Finance Minister Wolfgang Schäuble said the ruling "confirmed our policy of safeguarding the stability of the currency...this strengthens credibility and creates trust". Marcel Fratzscher, president of the Berlin-based DIW economic think tank, said Tuesday's decision was an important signal that Europe's instruments in dealing with the sovereign crisis were legally sound: "It supports the European rescue fund, which is an important safety system for Europe. In the end, it also helps to protect the interest of German companies and taxpayers."

Bert Van Roosebeke, financial market regulation expert with Freiburg-based think tank Center for European Policy, said the court had set a high hurdle for Germany to pull out of a future capital increase. For this to happen, he said, "the constitutional court would need to see an impairment of the parliament's budget autonomy to a very, very large extent".

WSJ reporting

Germany's deputy finance minister also welcomed the ruling, saying the decision backed up the government's own arguments. "I am very happy with the outcome because what the German government has put forward here has been reflected in the ruling and the Constitutional Court has confirmed (our views)", said Werner Gatzer, one of the finance ministry's deputy ministers, after the ruling was read out in Karlsruhe.

Reuters reporting