An Analysis by Thomas Darnstädt and Dietmar Hipp
The DAX, the euro, the markets -- up or down? All of the stakeholders want to know who actually won on Tuesday in the Federal Constitutional Court hearing in Karlsruhe.
Who emerged as the winner after the court had spend all of Tuesday negotiating the future of the fiscal pact and the European Stability Mechanism (ESM) with top politicians, economists and constitutional lawyers? Have the plaintiffs, the citizens and parliamentarians, won in their attempt to get a temporary injunction halting the laws aimed at rescuing the euro?
Or did things go in favor of the crisis managers in government and parliament, who had warned of market turmoil and a worsening of the euro crisis if the court were to side with the plaintiffs?
For the time being, the plaintiffs won. But only for the time being. They wanted to halt the process while the court assessed the constitutionalilty of the laws, and they achieved that. The laws regarding the ESM and the fiscal pact will not go into effect and the German president will not sign them until he gets the signal from Karlsruhe. How long that will take remains unclear.
The eight judges on the court's Second Senate have announced that they need time for a preliminary review of the complex issues. How exactly they are going to examine them, and whether or not it might take until the fall, remained undecided Tuesday.
Still, everyone breathed a sigh of relief. For the time being, nothing will happen. The money from the temporary bailout fund, or EFSF, will be enough for a little while longer, even without the ESM. And the fiscal pact has time until next year.
What's Going to Happen Now?
The euro saviors in Berlin have reason to hope that they will be able to scrape past Karlsruhe with their controversial stabilization treaties and associated legislation halfway intact. The 10-hour marathon hearing on Tuesday showed that the judges will go to great lengths to aid the passage of the ESM and the fiscal pact through the narrow corridor of Germany's constitution -- even if the whole thing, according to one Karlsruhe insider, will be "pretty tight."
If they had wanted to block the laws, the judges could have taken the easy option: proceedings to issue a temporary injunction only require a very superficial legal assessment at most. The so-called "stop application" only requires a weighing of consequences: What would be worse? The impact of a moratorium until the court makes its final ruling in the case? Or the fact that a possibly unconstitutional project could be realized?
On Tuesday in Karlsruhe, it could have been a simple matter: The disadvantages of permitting a possibly unconstitutional plan to relinquish German budget sovereignty to European euro bailout institutions would have been very difficult to undo. Once the ESM and fiscal treaties have been signed, it will be very hard for Germany to get out of them in a legally watertight and politically acceptable way. On the other hand: what's going to happen if the treaties have to wait a little longer? Nothing. We heard that in the hearing on Tuesday. Karlsruhe could have therefore taken a quick decision to issue the temporary injunction.
Serious Threat Rather Than a Veto
Finance Minister Wolfgang Schäuble's lawyers knew that, so they presented the court with a clever proposal. How would it be, they suggested, if the court as an exception conducted a slightly more thorough assessment during its preliminary "stop" proceedings? It would be a kind of advance notice of the final decision that the court could then take years to come up with.
Naturally, the trick will only work if such an advance notice rules in favor of the agreements. The message would be something along the lines of, "Don't worry, people, things will somehow work out OK." The court could happily go along with such a pragmatic but laborious approach if it were to take a similar view. After all, what good would all the work in the middle of the summer break do if the decision turns out to be a rejection? Who would that serve?
The Karlsruhe court has obviously signed up to this approach. The judges inquired how much time the government thinks they can spend on a preliminary legal examination of the fiscal pact and ESM without triggering renewed turmoil in the markets. No matter how long it takes, the decision that comes out will have the character of a final ruling. What judge would have the nerve to alter his ruling once a "provisional" decision had been taken?
This approach is wise, just like so many decisions by the Constitutional Court. Whether it was the Lisbon Treaty, the Greek bailout or the EFSF, the eight judges from the court's Second Senate always put their hands up, but not to veto. Instead, they made threats, which were intended seriously, saying: "Only this far, and no further."
Something similar could happen this time as well. But the questions the judges asked government officials made it clear that there are real constitutional concerns relating to the ESM. These include the issue of how the German parliament could prevent Germany from having to make additional multi-billion contributions to the ESM if, for example, the fund racks up deficits and other countries fail to make their payments. Also, how likely is it that Germany would one day be unable to fulfill its obligations toward the rescue fund, causing it to forfeit its voting rights on future decisions as a punishment?
The question of whether such worst-case scenarios should actually play a role in the decision over whether the ESM is constitutional is controversial, even among insiders in Karlsruhe. One of the judges, Peter M. Huber, preemptively raised the question of what would happen should the court decide that not the entire ESM treaty but just "individual provisions" were unconstitutional.
A possible answer was already given during the hearing. In that scenario, the court could in its ruling -- whether provisional or final -- demand that the German president add certain restrictive caveats or declarations to the law when he signs it. That might be perceived as an affront by Germany's European partners. The markets, however, would react calmly -- or at least more calmly than they would if the court were to swiftly grant a temporary injunction.
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