German Euro Ruling Karlsruhe Demands Greater Parliamentary Role in Bailouts

Germany's highest court has rejected three lawsuits against euro bailout measures, but its ruling also strengthens the role of the German parliament in determining aid for heavily indebted euro-zone countries. The new procedures are more democratic, but they could also lead to fresh turbulence on the finance markets.
Following Wednesday's Constitutional Court ruling, the German parliament (pictured here) will have a greater say in future euro bailouts.

Following Wednesday's Constitutional Court ruling, the German parliament (pictured here) will have a greater say in future euro bailouts.

Foto: Britta Pedersen/ dpa

Both the plaintiff and the defendant seemed in good spirits. Shortly before the start of proceedings, economics professor Wilhelm Nölling and German State Secretary of Finance Steffen Kampeter stood in the provisional courtroom in Karlsruhe talking shop. The were speaking about the appreciation of the franc , which Switzerland is now trying to stop by placing a ceiling on the exchange rate. Kampeter let his opponent know that he was well informed on the issue. "I want to take vacation in Switzerland," he said.

Shortly thereafter, the fun came to a halt. Germany's highest judicial authority, the Federal Constitutional Court, issued its anxiously awaited ruling on the euro rescue package on Wednesday morning. Although their cases were rejected, the decision still represented a partial victory for Nölling and the remaining plaintiffs. The justices declared that the billions in guarantees for Greece and other highly indebted euro-zone countries were fundamentally constitutional, but they also demanded a greater say and participation in future bailouts by Germany's parliament, the Bundestag.


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In the past, the justices of the Constitutional Court have shown themselves to be cautious skeptics of deeper European integration. The court gave its blessing in 1993 to the Maastricht Treaty, the founding document of the European Union, but noted that "democratic legitimation necessarily comes about through the feedback of the actions of the European institutions into the parliaments of the member states." The court also initially rejected a law accompanying the ratification of the Lisbon Treaty in 2009 because the justices didn't feel it sufficiently protected this legitimation.

At the time of these initial rulings, most of the justices had no way of imagining just how much additional responsibility would soon fall on parliament. At the peak of the financial crisis, the German government was forced to approve guarantees and capital aid of over €500 billion within the course of a single weekend in order to save the banking system from collapse. After its approval by Chancellor Merkel's cabinet, it was pushed through both houses of German parliament within five days.

An Ever-Increasing Number of Bailouts

The scenario repeated itself when the financial crisis turned into the sovereign debt crisis. On May 7, 2010 the Bundestag gave its blessing to guarantees of up to €22.4 billion that Germany contributed to the first bailout of Greece. On the very same day, euro-zone leaders agreed to a further rescue package for the entire common currency zone that would be approved by the Bundestag two weeks later. This time, Germany's share would be up to €123 billion. This month, it is supposed to be increased to a maximum of €211 billion.

The ever increasing speed at which new guarantees are expected to be approved has long since become a source of irritation for many in parliament. The plaintiffs in Karlsruhe, however, had even deeper concerns. In their view, the Bundestag has lost control of its constitutionally anchored right to determine budget policy and thus control how taxpayer money is spent. Whereas every minutiae of the German budget is debated in parliament each year before it is finally approved, the rescue funds in their view have served more like a kind of blank check. Once parliament has fundamentally agreed to bailout packages, Chancellor Merkel's cabinet can decide on its own how much to give each ailing country.

It is precisely these concerns that the court sought to address on Wednesday. The justices don't at this point believe that the planned guarantees will exceed any upper ceiling on aid. The court said that would first be the case if the Bundestag's budget-making autonomy were "not only limited, but practically entirely drained for an appreciable amount of time." The judges argued that even if the guarantees in the Greece package and the European Financial Stability Facility (EFSF) were never to be recouped, the losses could still be refinanced -- "though possibly with reductions to potential growth and creditworthiness."

Balance of Power Between Cabinet and Parliament Shifting

The current level of participation by the Bundestag was still too low for the court. Under existing law, the government must simply "seek" the approval of the parliamentary budget committee for new guarantees. If necessary, however, the committee may also only be informed after the fact. In the opinion of the judges, that was endangering the budgetary autonomy of the Bundestag. The government is now obliged to ask the committee in advance, if at all possible.

The new system strengthens the rights of the Bundestag, but not to the extent demanded by the plaintiffs -- who had wanted the Bundestag to be consulted before every new payment to an indebted country. But this could have led to new unrest in the financial markets each time, the judges warned. Plaintiff Joachim Starbatty was dismissive of such concerns. It was "not plausible that the world would collapse," he said.

Because of these concerns, German Finance Minister Wolfgang Schäuble, a member of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU), had fought against the Bundestag being given far-reaching powers. In contrast, Chancellor Merkel had said even before the court's decision that the Bundestag would be more involved than had previously been the case. The Karlsruhe ruling now makes the promise an obligation -- albeit within fairly narrowly defined limits.

Legal experts welcomed the verdict: "It is correct that the rights of the Bundestag be strengthened," said Peter-Christian Müller-Graff, professor of European law at the University of Heidelberg. "The core message is: There is no automatism -- and that is also very reasonable." That the budget committee must approve every step in the future is "a shift in the power between the federal government and the Bundestag." In practice, Müller-Graff expects that the government will agree with parliament in advance on future votes on major international decisions. "That at least would be smart."

Plaintiffs Could Continue Fight

Economists were also pleased with the verdict. "The ruling is likely to facilitate the euro rescue rather than make it more difficult," said Holger Schmieding, chief economist at Hamburg-based Berenberg, a private bank. Because approval is only necessary from the Bundestag's budget committee, the government will still be able to act quickly.

However, the judges expressed skepticism over the further deepening of integration within the euro zone when they referred to the violation of the so-called no bailout clause in the Maastricht Treaty under which the EU countries cannot be mutually liable for each other's debts. And they were also critical about the purchase of government bonds from indebted countries, as the European Central Bank has done.

It still remains unclear whether, in the future, the EFSF rescue fund will be able to buy up government bonds as planned, without first consulting the Bundestag. If this is called into question, it could lead to new problems in the financial markets. "If the decision means that bond purchases also have to be confirmed in advance, that would be fatal," said Henrik Enderlein, professor of political economy at the Hertie School of Governance in Berlin.

The court's critical comments may well encourage the plaintiffs to continue fighting against the euro and the rescue packages. In any case, the law professor Karl Albrecht Schachtschneider seemed energized on Wednesday. While he carefully showed off several books by euro opponents to the cameras, he was wearing black sports shoes with a suit -- as if he was ready to sprint to the next hearing.