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Monday, September 05, 2011

What will the German Constitutional Court ruling mean for the eurozone crisis?

We've put out a briefing today, looking at the upcoming German Constitutional Court ruling on the eurozone bailouts. The ruling is due on 7 September and whichever way it goes, it's likely to have an interesting impact on the future of the eurozone crisis. (See here for the full briefing).

In the briefing we suggest:
The Court will almost certainly find the complaints non-substantive – and therefore approve the bailouts – probably citing what it sees as the need to balance different legally protected interests, e.g. economic and monetary stability on the one hand, and property (owners of money) and democratic rights on the other. However, while the Court clearly is subject to political influences, it is also susceptible to public opinion, and will want to guard its own reputation. Similar to the line it has taken in past rulings on the Maastricht Treaty (1993), the euro itself (1998) and the Lisbon Treaty (2009), the Court might try to avoid sounding too positive on the bailouts by laying down further conditions as quid pro quo for nodding through the new measures
We continue, saying:
What could make the ruling political dynamite is if the Court lays down specific constitutional red lines, on, for example, joint debt liabilities, an upper ceiling on any future rescue package - asking for additional safeguards for the ESM for example - or on the relationship between the bailouts and Germany’s constitutionally rooted debt-brake. Any such limitations would further complicate moves towards a eurozone fiscal union, including the widely discussed pooling of debt and risk through Eurobonds. It’s also interesting to see whether the Court will address the reduced interest rates under the second Greek bailout (from over 5% for Greece, Ireland and Portugal under their original bailout deals, to around 3.5% now), since this increases the moral hazard of the loans and decreases the returns from them.
The briefing concludes that:
Giving Parliament a stronger say over EFSF/ESM would further restrict the manoeuvring room of EU politicians to swiftly bail out struggling governments and banks during market turmoil. While injecting more parliamentary democracy is clearly desirable, it will make the EFSF even more inflexible, in turn increasing market uncertainty, as EU leaders could see their hands tied in a crisis situation. One likely side-effect of this would be that the ECB has to take on the role of lender of last resort again (a role it is keen to avoid), as the EFSF would simply be too unresponsive to shoulder that responsibility. That would raise further questions over the political independence of the ECB and its primary mandate of price stability (rather than guarantor of the euro).
These challenges are also unlikely to be the last of their kind, with the debate over the legality of the bailouts and the ECB's bond buying heating up in Germany and elsewhere.

1 comment:

Rollo said...

This court is supposed to give decisions on the law. The law is quite clear, that no bailouts are allowed and the parliament is sovereign. It should not be dictated to by the acting president of Europe, Trichet, nor should it be skirting round the law to preserve the integrity of the Euro or of markets. I do not understand why you think it will give way.