Europe or Democracy? What German Court Ruling Means for the Euro
Germany's Constitutional Court ruling last Friday marks a significant escalation in efforts to rein in the European Central Bank. The ruling's message? Either the European Court of Justice has to stop bond purchases or German justices will.
Last Friday, when six justices on Germany's Constitutional Court cast doubt on European efforts to save the euro, the man who initiated the case was sitting obliviously at his desk. It was only when his secretary burst excitedly into his office that Peter Gauweiler understood that his case had created legal history.
Gauweiler, a member of German parliament who also has a legal firm located in Munich, managed to convince a majority of justices on the court's second senate that the ECB's program to save the European common currency is contrary to European law. The court referred the case onward to the European Court of Justice in Luxembourg, a first for the Karlsruhe-based German court. "Karlsruhe has shown ECB President Mario Draghi what a bazooka really is," Gauweiler crowed.
Gauweiler is likely the only German parliamentarian for whom the ruling is cause for such elation. The case regarding the legality of ECB efforts to assist ailing euro-zone member states has been ongoing for more than a year -- and Friday's move to refer the issue onward to Luxembourg has triggered concern and impatience among politicians in Berlin and the rest of Europe.
Sending the case to Luxembourg only appears to be an act of European conviction at first glance. In truth, it is nothing less than a final reckoning with the crisis-management strategy pursued by the ECB. There can be no doubt about it: The Constitutional Court is threatening to cause trouble.
The German justices insist that the German constitution sets limits on the ECB's strategy in the crisis. And that could have consequences that go far beyond the jurisdiction of the court in Karlsruhe. In a worst-case scenario, the Constitutional Court could forbid Berlin from contributing to efforts to save the euro or even force Germany to leave the currency zone entirely.
At first, however, the ECB reacted with relief on Friday when the German ruling was announced. It is what they had hoped for, said many within the Frankfurt-based bank. The European court is seen as being much more conciliatory than the German court and most believe that a complete cancellation of the bond-buy program (known officially as "Outright Monetary Transactions" or OMT) is unlikely. "The constitutional court is apparently unable to deal with the complexities of the issue and is now seeking to push responsibility onto the European Court of Justice," says Michael Hüther from the Cologne Institute for Economic Research.
But the relief might be premature. Even if the ECB wins the battle in the Luxembourg courtroom, it remains to be seen if the German court would be satisfied. A thorough reading of the decision reveals that, after spending months looking into the OMT program, a majority of the German justices have come to the conclusion for the first time that Draghi's bond purchases are unconstitutional. Only massive changes could make it acceptable.
Clemens Furst, head of the Center for European Economic Research, calls last Friday's ruling a "thunderbolt." The German court, he said, has made it clear that it finds OMT to be extremely problematic. "It is a clear signal," he says.
Hans-Werner Sinn, the euro-skeptic head of the Munich-based Ifo Institute, believes that the German court's position "will not remain without consequences for ECB monetary policies." Furthermore, the ruling "will strengthen the position of euro critics and the general skepticism Germans have of the ECB."
Politicians in Berlin, by contrast, are furious. "Why not just go ahead and continually review everything the government does?" snapped one conservative. He says the referral to the European court could slow euro-zone policy for the foreseeable future.
"Stability can only be established where there is trust," warns Michael Meister, parliamentary state-secretary in the Finance Ministry. "And you can't establish trust where there are open legal questions in the euro zone."
Conservatives are even more concerned because both Chancellor Angela Merkel's Christian Democrats and their Bavarian sister party, the Christian Social Union, face a not insignificant challenge in the run-up to the European Parliamentary elections in May from the anti-euro party Alternative for Germany (AfD). Of course, members of AfD are extremely pleased with last Friday's ruling. "I am enormously satisfied with the decision," says party head Bernd Lucke. "Finally, a court has found that the ECB's bond-buying program is a clear violation of European law." He adds that the ruling provides "an important boost for the campaign."
It is also a clear indication that Germany's highest court is extremely skeptical of the ECB. Draghi's 2012 announcement that the ECB would embark on unlimited sovereign bond purchases from ailing euro-zone member states, the court found, is incompatible with European law. The ruling notes that OMT "exceeds the mandate" of the ECB and "encroaches on the responsibility of the member states for economic policy." Furthermore, it finds that the purchasing of sovereign bonds on secondary markets represents a "circumvention" of the prohibition against direct state financing.
The logic followed by Karlsruhe has been considered to be incontrovertible since the 2009 ruling on the Lisbon Treaty. Measures taken by European institutions that are not covered by treaties occur "ultra vires," meaning they violate the sovereignty of EU member states.
By extension, that means that if the German government and parliament do not protect the country from the multibillion euro policies of the ECB, then the Constitutional Court must step in -- even by way of a verdict which could force Berlin to withdraw from the euro zone. Germany, after all, is liable for a lion's share of the billions spent by the ECB on bailouts. That liability, however, limits parliament's constitutionally guaranteed control over how tax money is spent. Furthermore, that budgetary right is what gives German voters a say in economic and budgetary policy. Thus, the right to vote grants every German the power to challenge policy overreaches in the attempt to save the common European currency.
This link-up of law and politics, the court made clear on Friday, is preliminary, and thus "subject to the interpretation by the Court of Justice." But several of the ruling's passages seem to indicate that the repeated references to the preliminary nature of the Constitutional Court's finding are little more than politesse. Karlsruhe, the document makes clear, will not shy away from conflict.
The German court's strategy is clear. Should justices in Luxembourg share the German interpretation, then the Constitutional Court could hide behind the European Court of Justice and pose as model Europeans in the ongoing battle over final jurisdiction on the Continent.
In the case, however, that Luxembourg doesn't completely share the view articulated in Friday's verdict, the German court has built a bridge. Should Luxembourg interpret OMT as being "in conformity with primary law," it could, within the conditions set by the German court, satisfy the Constitutional Court's concerns, the ruling notes.
Essentially, there are three conditions set by Karlsruhe to ensure that a bond-buying program not be ultra vires: An upper limit to the bond purchases must be set; debt haircuts for the countries in question must be excluded; and the same conditions that apply to recipients of European Stability Mechanism (ESM) aid must apply to those countries benefitting directly from the bond purchases.
It is, once again, the German hardline. The question as to whether such a program would sufficiently impress the markets is one to which Draghi would likely respond in the negative. But can European justices really set binding guidelines? And what happens if Luxembourg accepts only some of the conditions set by the German court?
Should the European Court of Justice come to a different conclusion than that reached by the German court, then the conflict promises to escalate. The German court, after all, has reserved the right to reject a European court ruling should it not fulfill the legal standards applied in German jurisprudence. Such a situation, in which the German high court simply disregards a ruling from the European Court of Justice, would be the worst-case scenario for Europe.
- Part 1: What German Court Ruling Means for the Euro
- Part 2: What About ECB Independence?