Germany has come to the rescue. On Wednesday, the German constitutional court ruled against calls to block the creation of the new eurozone rescue fund – the European Stability Mechanism (ESM) – which can now theoretically go ahead. After the ruling, markets rallied: Spanish, Italian and German share indexes rose, while the euro continued its recent gains to hit a new four-month high against the dollar.
Combine the ruling with Super Mario’s unconditional, super bond-buying plan and it looks like the eurozone has all the tools it needs to worm its way out of the economic crisis. Echoing the words of Angela Merkel: today is a good day.
However, not so fast. With the court’s ruling, there are conditions. Namely, Germany has capped its contribution to the fund at €190 billion, and any adjustments to this will only be permitted with further agreement by the Bundestag. And if changes are made that would affect Germany’s contribution, it looks as if the court has included a get-out-of-jail-for-free-card clause to the ruling as well:
| “The Federal Republic of Germany must express that it does not wish to be bound by the ESM Treaty in its entirety if the reservations made by it should prove to be ineffective.” |
And rather than paving the way for the perfect duo of bond buying and the ESM, the court ruling might turn out to be no more than a temporary allowance to permit the ESM to limp forward into operation:
| “To the extent that the applicants in proceedings 2 BvR 1421/12 object to euro rescue measures taken by the European Central Bank, in particular to the acquisition of government bonds on the secondary market, arguing that the measures, as what is known as “ausbrechende Rechtsakte”, transgress the framework of authorization established by the German Acts of assent to the European Union Treaties, their application for a declaration to this effect is not encompassed by the application for the issue of a temporary injunction and therefore can only be reviewed in the principal proceedings.” |
Perhaps there could be good news hidden within the court’s proceedings, though. As Barclays' analysts point out:
| “With the court only setting utmost limits, it did not appear to exclude the possibility that other vehicles, such as a debt-redemption fund proposed by the German Council of Economic experts with still much larger German guarantees than the ESM, could fit under Germany’s constitution.” |
Germany’s cap won’t completely hamper Mario Draghi and Merkel’s rescue plan, and dampen our spirits. Maybe. Nevertheless, there is another condition that, according to Alex White at JPMorgan, is a more pressing cause for concern. The court rules that the provisions of the ESM Treaty do not stand in the way of the “comprehensive information of the Bundestag and of the Bundesrat”. Meanwhile:
| “The ESM Treaty provides for professional secrecy and the ‘inviolability of ... official papers and documents’ of its staff. Under the current Treaty there could be no guarantee of the Bundestag and Bundesrat having access to a fully exhaustive set of information about the ESM's activities. Bruegel, a respected European think-tank, has already suggested that this could delay ESM implementation. We believe that the requirements to inform the German Parliament can still be met under the current Treaty, and that implementation is unlikely to be delayed in practice. However, arguments such as this will likely resurface, and could potentially be tested if the Bundestag ever feels that it has been cut out of the loop.” |
As White points out, there is an obvious tension between the ESM Treaty and the German constitutional court ruling. Rather than putting an end to ESM Treaty ratification, the court has set a precedent for other cases that will inevitably come to the fore. As White states:
| “...there are two important points to bear in mind. Firstly, the broader process of legal challenge to Europe’s crisis-management framework won’t end here. We expect further cases to be brought both to the German constitutional court, and to the European Court of Justice, as each stage of integration is brought forward. Legal challenges about the role of the ECB seem likely, and legal questions would also open up about any further moves – for example any attempts to give the ESM a banking licence. Secondly, from the political perspective, this process of legal challenge has acted as an amplifier for public concerns about the whole European project. We can expect to see this reflected more strongly as Europe continues on its journey towards greater integration.” |
More court cases to follow, we expect.