ECB gears up for German Constitutional Court scrutiny

This is set to be an important week for the ECB and therefore the eurozone.

As we noted in a flash analysis this morning, the German Constitutional Court (GCC) will hold a hearing on the 11 and 12 June focusing on whether the ECB’s policies have infringed either its own or the Bundesbank’s mandate, and if these have created fiscal risks without democratic approval.

The focus of the case will be the OMT, the ECB’s flagship bond buying programme, the announcement of which is widely seen to have played an important role in easing the eurozone crisis.

Why is the case important?

1. Highlights the tensions at the heart at the eurozone: the case is a microcosm of the wider debate as to whether Germany is willing and able (in terms of legal constraints) to do what is seen as necessary to save the eurozone. It also puts pay to the idea that once the German government has a fresh mandate following September’s election, there will be a swift move towards more eurozone integration – these legal questions will remain and will continue to crop up.
2. Pits the ECB against the Bundesbank: linked to the point above but this is also a very awkward division within the eurozone architecture, as personified by the confrontation of the ECB's Jörg Asmussen on one hand and Bundesbank President Jens Weidmann on the other. The Bundesbank will likely have to keep implementing ECB policies despite it now being well known that it fundamentally disagrees with them. 
3. Further constraints on crisis policies: in the end, the GCC will likely rule in favour of the ECB. However, as with previous rulings, it could set out red lines and restrictions to protect the German Constitution – this could throw a new element of risk into the crisis.
4. Increased transparency on ECB actions: this is something which we, and others, have been calling for for some time. One benefit of the case is that it has increased scrutiny on the OMT with the ECB now admitting it may be forced to published the legal documents which will layout the practical functioning of the OMT. This could generally be beneficial, although if markets do not like what they hear then it could actually contribute to market jitters.

With this final point in mind, there was an interesting story in FAZ over the weekend, which suggested that the OMT is not in fact as “unlimited” as had first been thought. Indeed, FAZ claimed that it is limited to €524bn, since the ECB will only be allowed to purchase debt with maturity between one and three years.

This constraint was always known, as we noted when the programme was announced. The cap essentially arises because this is the total amount of debt from Italy, Spain, Ireland and Portugal (i.e. those countries most likely to access OMT). The cap doesn’t seem to be hard and fast then, since countries could simply issue more short term debt. However, this does come with its own risks (another point we raised at the time), and the ECB has suggested it would look to prevent such an approach, although it hasn't said how.

Handelsblatt goes even further, suggesting that there is an internal rule which limits the ownership of bonds by the ECB to 50% of the given market, suggesting this means the cap is even lower at €260bn.

But even if the cap isn't quite what it’s cracked up to be, it’s very interesting that the ECB itself is selling it to the GCC as a limit. Clearly, there is some concern about the outcome on its part.

Despite a definitive ruling not expected until the end of the summer at the earliest, and more likely after the September elections, there could well be plenty of interesting revelations and disputes aired over the next few days, which we will of course be covering in detail.

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.

European solidarity has a limit, even if your name is Adenauer

Adenauer is a name synonymous with the European project, owing to Konrad Adenauer, the German Chancellor from 1949 to 1963, one of the founding fathers of the European integration.

However, in a sign of the changing attitudes in Germany to the euro in particular, his grandson, Patrick, is sponsoring a lawsuit against the €85bn loan for Ireland agreed yesterday by EU finance ministers. He is one of the 50 supporters of a legal challenge to be submitted this week by Professor Markus Kerber - the renowned academic and constitutional expert who will also be speaking at our event in Brussels on 9 December.

European solidarity clearly has a limit in Germany, even if your name is Adenauer.

“Economic laws will always triumph over political power"

Open Europe's evening seminar yesterday featured Prof. Dr. Wilhelm Hankel, one of the five German Professors who have challenged the legality of the eurozone bailout at the German Federal Constitutional Court. Please click here to read a more detailed summary and access the audio.

It had all gone a bit quiet on the 'eurozone crisis' front during the summer but this week we have been reminded that it has not gone away. New fears over various banks' exposure to bad debts have led to the ECB again buying Greek, Irish and Portuguese bonds, according to a trader involved in the transactions. Today’s purchases were reportedly for about €10 million ($12.7 million) each. (One of the three grounds on which the five German professors consider the bailout illegal is the ECB’s decision to intervene directly in the crisis by buying government bonds from weaker eurozone countries.)

One of the many interesting remarks made by Professor Hankel last night was that the “ammunition” of the multi-billion eurozone rescue packages “may not be sufficient” to bail out the eurozone in the long-term. These bailuots are essentially a political sticking plaster to paper the cracks in the economic architecture of monetary union. “Economic laws will always triumph over political power, at least in the long term”, he added, quoting Eugen von Böhm-Bawerk – one of the founding fathers of the Austrian school of economics.

It seems pretty difficult to argue with that statement.

Is the eurozone bailout legal?

We've asked this question several times before, but the German think-tank Centrum für Europäische Politik has now also produced a very interesting study on the topic. In the study, the CEP trashes the legality of the €60 billion credit facility, agreed in May (as part of the €500 billion bailout package). This facility, as we set out here, involves the European Commission borrowing on the markets, using the EU budget as collateral. The legal base for the fund is Article 122 of the EU Treaties, intended to provide assistance to EU states in the event of natural disasters or sudden energy blackouts, ("exceptional circumstances" beyond a member state's control, as the text states).

The study is all over the German press - and it certainly provides ammunition to the legal challenges against the bailout, currently making their way through the German Constitutional Court. The study claims that the public has been deceived on several points, arguing that the aid scheme will not be limited to three years, as the Commission claims, but would be “installed indefinitely”.

“The public has been assured that the EU cannot borrow above a maximum of €60 billion. In the legal text no such regulation can be found," says the author of the study, Marcell Jeck.

The CEP also argues that the EU has misused Article 122 as a legal base for the bailout fund and that the European Parliament was not consulted, which amounts to a breach of EU law. The report also suggests that the bailout package does not satisfy the terms of the German Constitutional Court’s previous rulings, as it does not provide a strong enough role for the German Parliament in approving aid.

The German government today responded to the study, with spokesperson Christoph Steegmans refusing to comment on the legal challenge itself, only saying that Germany is entering "unchartered constitutional territory". He added, "The federal government has always taken great care to minimise possible constitutional risks along with the emergence of the EU aid package."

Everybody is now awaiting the verdict from the German Constitutional Court on the legaility of the aid package. Tomorrow at 11h30, a press conference will be held by the four Professors who launched the legal complaint with the Court.

In an ad (see picture) in today's Frankfurter Allgemeine Zeitung, they argue: "the aid package from Brussels does not save the currency union (…) It is forbidden that the Community or a Member State is liable for the financial obligations of another Member State (…) we are sure that our highest Court will declare this coup unconstitutional against parliamentary democracy and economic efficiency."

For what it's worth, we can see at least three reasons why the aid package should be ruled illegal, if it were to be objectively assessed in a Court:

1) As the CEP points out, the use of Article 122 in this way involves a heroic legal interpretation - particularly as the European Council has previously said that Article 122 must be compatible with the “no bail-out clause” in the EU treaties. The fact that Article 122 involves Qualified Majority Voting, rather than unanimity, makes it even more outrageous.

French Europe Minister Pierre Lellouche summarised how contentious the issue is last month when calling the bailout an “unprecedented” change to the EU treaties. “It is an enormous change,” he said. “It explains some of the reticence. It is expressly forbidden in the treaties by the famous no bail-out clause. De facto, we have changed the treaty.”

2) As the CEP also points out, the bailout package has sidelined the Bundestag and Bundesrat, despite the German Consitutional Court making a stronger role for these bodies in EU affairs conditional on approving the Lisbon treaty in its ruling on the Treaty last year.

3) In addition - something which the CEP doesn't touch on - the EU Treaties clearly specify that any decision that involves the EU’s budget must be taken by unanimity, meaning that individual member states have a veto over any agreement. The stabilisation fund clearly does involve the EU budget, as the loans are backed by the budget and any defaults will be covered by the budget (there are even p.m. lines in the EU budget for the fund) – and yet it was decided by majority vote. Moving from unanimity to QMV is a transfer of power which needs the approval of national parliaments. In the words of the German Court:

“…The right of veto in the Council may not be waived without the participation of the competent legislative bodies even as regards subject-areas which have already been factually defined in the treaties. The representative of the German government in the European Council or in the Council may therefore only approve an amendment of primary law through the application of one of the special bridging clauses on behalf of the Federal Republic of Germany if the German Bundestag and, in so far as required by the provisions on legislation, the Bundesrat, have approved this decision within a period yet to be determined…”

The Court has come closer and closer to rule EU Treaties incompatible with the German Basic Law, in the cases of Maastricht, Amsterdam and Lisbon - but has always stopped just short of pulling the trigger. Will it go for the nucelar option this time?

Well, it would be a cataclysmic event if it decided to rule the bailout illegal - our feeling is that they will probably stop just short this time as well.

At the end of the day, this Court is not immune to politics, and the politics of the bailout is driven by a too-big-to-fail logic. But which ever way one looks at it, it doesn't seem right.

The Karlsruhe factor

As riot police today were forced to use tear gas against violent crowds in Athens protesting against further Greek spending cuts to narrow the country's budget deficit (and save the eurozone), we recieved another reminder of German opposition to any cross-border rescue operation.

Travelling to Germany today to meet with German Chancellor Angela Merkel, Greek PM George Papandreou insisted that Greece is not seeking money from the EU. According to Le Monde, German Economic Minister Rainer Brüderle said in response: "Papandreou has said that he doesn't want a cent. In any case, the German government will not give a cent".

Meanwhile, German daily FAZ looks at another obstacle to a Greek bailout: the German Constitutional Court. Based in Karlsruhe, this Court is very much the X-factor in EU integration, as evidenced by the extrordinarily sceptical ruling it delivered on the Lisbon Treaty. Apparently, a spokesperson for Angela Merkel has let it slip that the Chancellor privately fears that a bailout would provoke the country's Constitutional Court to take action, possibly blocking the whole operation. It's article 32 of Germany's "Law on the Federal Constitutional Court" (Gesetz über das Bundesverfassungsgericht) that is the sticking point.

This article says that,

In a dispute the Federal Constitutional Court may deal with a matter provisionally by means of a temporary injunction if this is urgently needed to avert serious detriment, ward off imminent force or for any other important reason for the common weal.

In plain English, a bailout operation of Greece could become Karlsruhe territory. Specifically, the Court could interevene against what it considers a breach of the law - in this case the EU Treaties' ban on bailouts and extending credit lines to other member states.

Former federal judge Paul Kirchhof is quoted by FAZ saying that "If parliaments and MPs feel that their rights have been violated, they can appeal to the Constitutional Court." Based on such an interpretation of Article 32, notes FAZ, the Karlsruhe judges can block Merkel if she decides to help financially.

All of this is speculation of course, but an interesting indication of the forces at work in Germany at the moment - and the massive opposition that a bailout could provoke.

Ja, aber

The fall-out of the long awaited decision of the German Constitutional Court on whether the Lisbon Treaty violates the German Constitution (or "Basic Law") is ongoing, with German parties battling it out as to what it all means.

In a nutshell, the Court ruled broadly in favour of Lisbon but withheld approval for immediate ratification, demanding a law to guarantee the rights of the German Parliament in the EU decision-making process.

In its press release, the Constitutional Court noted that the German ratification act should be modified because the German Bundestag (Lower House) and Bundesrat (Upper House) “have not been accorded sufficient rights of participation in European lawmaking procedures and treaty amendment procedures.”

Handelsblatt analysed: “for the Court there is only one real basis for democracy in the EU: the national Parliaments”.

German ratification of the Treaty could be delayed until after the German national elections on 27 September because the Bavarian Christian Democrat CSU party and the Social Democrat SPD party, both of which are in government, have opposed fast-tracking the new law. With Czech President Vaclav Klaus vowing to be the last one to sign the Treaty, the German ruling offers him the opportunity to further delay the final step in Czech ratification. (Welt, 30 June; Handelsblatt, 3 July)

More widely, the ruling raises serious questions about the role of national parliaments and the Lisbon Treaty - shouldn't similar democratic safeguards be required for national parliaments in all member states?

This message has been echoed by publications across Europe, with French newspaper L'Alsace saying, "The German court has signalled that it is necessary - and possible - to convey rights upon the national parliaments in European decision-making. It's a pity such a message was not evoked by France". Dutch magazine Elsevier wrote, "What does this judgment mean for the sovereignty of other member states? Should they not also build a guarantee into their own legislation in order to secure their right to self-determination?"

In an analysis in English, German weekly Der Spiegel noted that the decision "very elegantly demolishes the old European idea that the recognised democratic deficits in the EU would disappear completely of their own accord by enhancing the rights of the European Parliament".

We will very soon return with our analysis of this extremely important question, looking at exactly what the ruling said and what changes are expected to be made to the German system of parliamentary scrutiny of EU law in order for Lisbon to come into force.

But reading through the long, and often awkwardly-worded English version of the Court's decision throws up several devastating conclusions in there that have so far escaped attention.

In particular, the ruling confirms what Open Europe has long been arguing - the simple fact that the Lisbon Treaty's extension of majority voting to so many new policy areas (about 60), necessarily means less influence for national parliaments in policymaking. Advocates of the Treaty have tried to ignore this simple and very logical truth, but here we have it from the Court:

"The status of national parliaments is considerably curtailed by the reduction of decisions requiring unanimity and the suprantioanlisation of police and judicial cooperation in criminal matters."

It also clearly states:

"The Treaty of Lisbon does not lead to a new level of development of democracy."

With all these 'ifs' and 'buts', it seems unsurprising that 77% of Germans want a referendum on the Lisbon Treaty, according to our new poll.