Awaiting a Verdict What's at Stake in the Euro Rescue Fund Ruling?

Germany's highest court is expected to rule on the constitutionality of the permanent euro bailout fund on Wednesday. Opponents of the European Stability Mechanism are hoping justices will decide it can only go into operation if a national referendum is held and the constitution is changed.

A crosswalk button near the European Central Bank headquarters in Frankfurt reads: "We're waiting for a green light: Signal is coming."

A crosswalk button near the European Central Bank headquarters in Frankfurt reads: "We're waiting for a green light: Signal is coming."


Sometimes it is the parachute itself that can become the danger -- if the lines get tangled, for example. If that happens, a parachutist can release the device and activate a backup instead.

More than 37,000 people in Germany view the permanent euro rescue fund, the European Stability Mechanism (ESM), as a similar kind of danger. They are backing the group Mehr Demokratie, or "More Democracy," in its lawsuit at the Federal Constitutional Court against Germany's ratification of the treaty that establishes the ESM. The petitioners believe that the aid mechanisms for crisis states, as well as the associated fiscal pact, are undemocratic and entail uncertain financial risks. They are hoping the court's decision on Wednesday will pull the ripcord on the ESM and prevent it from going into operation.

It's not the first time Germany's efforts to save the euro have been challenged in the country's highest court, either. Another suit brought to Karlsruhe last year unsuccessfully challenged the constitutionality of financial aid for Greece and the European Financial Stability Facility (EFSF), the ESM's predecessor. The broad ideological spectrum of the appellants alone is indicative of growing anxiety over the euro bailout. Those backing the case run the gamut from Mehr Demokratie to the Left Party, right up to Peter Gauweiler, a conservative politician with the Christian Social Union, the Bavarian sister party to Chanceller Angela Merkel's Christian Democratic Union.

Gauweiler landed in the headlines again this weekend when he filed a second emergency complaint with the court demanding that it delay its decision based on the new plans announced last week for the European Central Bank to buy bonds from beleaguered euro-zone governments. He argued that the ECB had "created an entirely new situation" that the court needed to take into account when considering the original petitions filed against the ESM and the fiscal pact. The Constitutional Court justices must halt the ratification of the ESM until the ECB reverses its position, he said. On Tuesday, however, the court said it would still announce its ruling as planned on Wednesday.

Meanwhile, the pressure among politicians both inside Germany and abroad to swiftly ratify the ESM to avoid jeopardizing euro rescue efforts is similarly massive. As far back as July, the court justices also acknowledged this pressure when court President Andreas Vosskuhle announced that they needed longer than usual to consider the case. The explanation for the delay was that the court knows very precisely that if it rules against the ESM, the immediate headline, particularly in the international press, will be: "Euro rescue stopped."

But is that really true? Would a veto of the ESM honestly put an end to efforts to save the euro? And are there possible alternatives?

Should the People Decide?

The plaintiffs with Mehr Demokratie are, in any case, hoping for a big bang in Karlsruhe. They want Germans to be given the chance to decide themselves on the euro rescue in the form of a national referendum. "There are two possibilities," says Michael Efler, the spokesman who represents Mehr Demokratie's board. "Either the citizens must vote for an entirely new constitution under Article 146 of the current basic law, or they must modify Article 23 of the constitution so that a referendum will be required any time Germany cedes any additional sovereignty."

Despite frequent debates over the use of referendums in recent years, Germany has largely excluded the possibility of plebiscites in politics. But Efler believes the time has come for the constitution to be changed. "We were never before as close (to changing it) as we are now," he says.

Nor is he alone in this opinion. Of the €700 billion ($896 billion) that the ESM will have at its disposal, Germany is liable under current provisions for up to €190 billion. In an editorial written earlier this year for the Frankfurter Allgemeine Zeitung newspaper, respected legal experts Wolfgang Kahl and Andreas Glaser, who both work for the University of Heidelberg's Institute for German and European Administrative Law, argued that ratifying the ESM would essentially change the German constitution. This is because it would transform the "EU into a federal fiscal union in the form of a transfer, liability and tax union," they wrote. That development, they argued, would "obligate the Bundestag (Germany's federal parliament) and the Bundesrat (the upper legislative chamber representing the states) to order a referendum."

Even German Finance Minister Wolfgang Schäuble has been supportive of the idea of a referendum. In a SPIEGEL interview this June, he suggested it should happen over a period of several years. However, developments with the ESM could force Schäuble to move faster. If the court stops its ratification, he has warned, it could lead to "considerable economic distortion with unpredictable consequences."

Court Could Ask for Revisions

That may be how the justices ultimately view the situation as well. After all, in previous rulings on the issue, they have expressed their view that the euro bailout fund is fundamentally legitimate. It is more realistic that the court will ask for improvements to the current ESM treaty, rather than a comprehensive change to the German constitution. And there are indeed two areas where the court may ask for revisions.

First, the court may further bolster the Bundestag's right of co-determination in decision-making in euro rescue policies. In the past, the justices have ruled that parliament's budget committee must be integrated at an earlier stage in decision-making about new European bailout packages for struggling euro zone countries. The court also overturned plans by the German government to create a special panel that could quickly approve bailout packages in expedited proceedings. It is foreseeable that it might accommodate the anti-ESM petitioners by ordering that an opt-out clause be built into the treaty. Currently there is no such provision. This would reduce the concerns of some parliamentarians that voting to ratify the treaty would lead to losing control of considerable parts of Germany's national budget in the long term. And that is no small sum, either, given that Germany's €190 billion commitment to the ESM represents 60 percent of the country's forecasted 2012 tax revenues of €306 billion.

Secondly, the justices might define an upper ceiling for Germany's ESM liabilities. The fact that the ESM is already considered too small in the event that Spain or Italy have to apply for aid speaks for this possibility. This is also because Germany's share of liability would increase if other countries that are now contributing to the ESM needed to borrow from it and were no longer able to pay in. Additionally, there are also demands to equip the ESM with a banking license for the purpose of purchasing government bonds, which would theoretically create limitless liability for Germany.

The court could counter such concerns by capping Germany's current guaranteee pledge of €190 billion as the highest amount possible. Of course, this limit wouldn't convince every ESM opponent, since many consider the euro-zone crisis countries to be bottomless pits and the euro itself to be a badly designed currency. "It would be a good deed if the people of Europe were freed of this oppression," says German constitutional law expert Karl Albrecht Schachtschneider, one of the plaintiffs in the case. Supporters of his position have been further strengthened by the ECB's announcement that it would purchase sovereign bonds on secondary markets in unlimited quantities. They warn that the central bank's intervention threatens to create incalculable costs for Germany.

But the plaintiffs with Mehr Demokratie also say they could tolerate further aid for Southern Europe. For them, it's not a question of "if," when it comes to rescuing the euro, but solely one of "how" -- in other words, they want a democratic legitimation of the bailout. "We're not saying that it is wrong to give money to Greece or Spain," Efler says. "That's not our job."

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