27 August 2012

Hans-Werner Sinn: Judgement day for the eurozone

Europe and the world are eagerly awaiting the decision of Germany's Constitutional Court on September 12 regarding the European Stability Mechanism (ESM). But there are serious concerns on all sides about the pending decision, writes Sinn in his article for Project Syndicate.

The Court must rule on German plaintiffs’ claims that legislation to establish the ESM would violate Germany’s Grundgesetz (Basic Law). If the Court rules in the plaintiffs’ favour, it will ask Germany’s president not to sign the ESM treaty, which has already been ratified by Germany’s Bundestag (parliament). 

There are serious concerns on all sides about the pending decision. Investors are worried that the Court could oppose the ESM such that they would have to bear the losses from their bad investments. Taxpayers and pensioners in European countries that still have solid economies are worried that the Court could pave the way for socialisation of eurozone debt, saddling them with the burden of these same investors’ losses.

The plaintiffs have raised several objections to the ESM. First, they claim that it breaches the Maastricht Treaty’s “no bailout” clause (Article 125)... The plaintiffs argue that, in the case of Greece, breaching Article 125 required proof that its insolvency would pose a greater danger than anticipated when the Maastricht Treaty was drafted. However, no such proof was provided. Second, Germany’s law on the introduction of the ESM obliges Germany’s representative on the ESM Council to vote only after having asked the Bundestag for a decision. According to the plaintiffs, this is not permissible under international law... Moreover, the plaintiffs claim that, while the ESM treaty is restrictive in granting resources to individual states, requiring a qualified majority vote, it does not specify the conditions under which losses are acceptable... Joint and several liability, the plaintiffs assert, contradicts the Court’s previous statements that Germany should not accept any financial commitments stemming from other states’ behaviour. Worse, according to the plaintiffs, although the liability of any country vis-à-vis external partners is limited to that country’s share of capital, this limitation does not apply to other signatory states. 

Finally, the ESM cannot be considered on its own, but must be seen in the context of the total exposure amount, which includes the €1.4 trillion in bailout funds that have already been granted. In particular, the Target2 credit drawn by the crisis-afflicted countries’ central banks, which already totals almost €1 trillion, should also be taken into consideration.

Full article

© Project Syndicate