The Next Setback Germany Faces Delay in Ratifying Euro Rescue Fund

Germany's highest court asked the country's president on Thursday to delay ratification of the permanent euro bailout fund, the European Stability Mechanism, and the fiscal pact into law next week. If he complies, the move could delay the implementation of the ESM by several weeks in the latest setback for Chancellor Angela Merkel.
Waiting game: German President Joachim Gauck (left) has been asked by the country's court to delay the ratification of the permanent euro bailout fund.

Waiting game: German President Joachim Gauck (left) has been asked by the country's court to delay the ratification of the permanent euro bailout fund.

Foto: dapd

The pleasant news arrived from the northeastern port city of Rostock on Thursday. German President Joachim Gauck was to be named an honorary citizen of the city of his birth. The other news, which came from the southwestern city of Karlsruhe, was not as uplifting. The judges on Germany's highest court, the Federal Constitutional Court, had asked the president to delay signing the European Stability Mechanism (ESM) and the European Union fiscal pact into law.

The Constitutional Court, anticipating challenges to the legislation, wanted more time to review documents. Gauck, hardly three months in office, was already faced with an important decision. If he complied with the request from Karlsruhe, at least one piece of legislation proposed by Chancellor Merkel and her coalition government -- the permanent bailout fund known as the European Stability Mechanism (ESM) -- would undoubtedly be delayed. The ESM was originally scheduled to come into force on July 1, 2012.

Now the ESM will have to wait.

Gauck doesn't want to sign the two laws, at least for now, when they are presented to the two houses of the German legislature -- the federal parliament, the Bundestag, and the upper legislative chamber, the Bundesrat -- for ratification next week. However, laws in Germany are only considered ratified, and therefore binding under international law, when signed by the president. Now it could take another two or three weeks before the court rules on possible emergency appeals.

Declining a request by the Constitutional Court judges, especially on such a delicate matter, would have created a massive conflict and set off a debate on the question of whether a German president in cases of doubt has the power to ignore Karlsruhe. It was a conflict Gauck was anxious to avoid. According to a statement by the president's office, Gauck intended to "comply with the request, in keeping with standard government practice among the constitutional bodies, and out of respect for the Federal Constitutional Court, as soon as the Bundestag and the Bundesrat have adopted the corresponding treaty laws."

For Merkel, this means that what has already been a grueling struggle over rescuing the euro is now entering the next phase. A ratification on July 1 would have sent a strong signal to the financial markets: Namely that the euro rescue is going according to plan. But now, at least for a while, it will remain subject to a possible decision from the Karlsruhe court. That may not be a disaster, but it is a symbolic setback for European leaders seeking to rescue the euro. Once again, those plans face another delay.

Emergency Appeals by the Left Party and a Former Minister

For now, Germany's highest court has the final say. The Left Party and former Justice Minister Herta Däubler-Gmelin, a member of the center-left Social Democratic Party (SPD), have announced their intention to file suits against the ESM and the fiscal pact. They are expected to file emergency appeals against the measures as soon as they are approved by legislators.

Almost no one in Merkel's coalition government of the center-right Christian Democratic Union (CDU), its Bavarian sister party the Christian Social Union (CSU) and the pro-business Free Democratic Party (FDP) believes that Karlsruhe will actually stop the fiscal pact and the ESM. And neither does the opposition, which doesn't want to imagine the prospect of both projects failing on Germany's account. "The house is on fire," says a leading member of the Green Party opposition, in a reference to Spain. He is expressing the dilemma that the Constitutional Court also faces as it considers the possibility of legal challenges, namely that the judges are also keeping an eye on the nervous markets.

The fiscal pact, a pet project of Merkel's, was agreed on by 25 of the EU's 27 member states at a summit in January. Those nations are committing themselves to stricter budgetary rules, such as reducing their budget deficits to less than 0.5 percent of gross domestic product.

Meanwhile, the ESM is part of the solid core of the future euro bailout program. It is not just Merkel, but also the Euro Group and worldwide markets that are depending on the ESM to help restore stability to the common currency. Unlike the current European Financial Stability Facility (EFSF), the ESM, with €700 billion ($888 billion) in share capital, can also provide more bailout funds in the long term. The problem is what has to happen before the ESM can begin disbursing funds: The fund can only take effect once it has accumulated 90 percent of its capital -- that is, once it has been ratified by the eight countries with the largest shares of ESM capital. Germany, with its share of about 27 percent, is the largest donor -- so nothing can happen without Berlin.

For now, the ESM is still just a plan. Several countries, including Spain, Belgium and Italy, intend to ratify it before July 1. France and Greece have already ratified it. In the Netherlands, the legislation still requires approval of the Dutch Senate, the upper house of the country's parliament. Ratification is also expected to be delayed in Austria, because the government's two-thirds majority in parliament is in trouble. And now German approval is missing, at least for the time being.

A Blemish for Merkel

Following Gauck's request, Karlsruhe will probably spend two to three weeks examining possible emergency appeals. So how dramatic would this delay be? The European Commission recently urged all countries in which ratification is still pending to act quickly. It argued that launching the ESM on schedule is necessary in order to demonstrate the ability to take action in the crisis and regain market confidence. On the other hand, the ESM isn't needed yet, because the EFSF remains in effect until mid-2013. It can bridge the gap that will be created until the ESM comes into force, as long as countries like Italy don't collapse and want to avail themselves of the bailout fund. If that happens, the funds in the EFSF will not be sufficient.

Even though the fiscal pact isn't even slated go into effect until Jan. 1, 2013, the ESM delay still represents a blemish in the Merkel administration's efforts to stabilize the crisis-plagued euro. After all, it was precisely with the double bill to approve the ESM and the fiscal pact that Merkel wanted to symbolically show the rest of Europe that Germany is, in fact, capable of acting. It was only in talks with the opposition on Thursday morning that the chancellor had cleared a final hurdle, enabling the ESM and the fiscal pact to be approved by the Bundestag in late June -- as Merkel had wished. The Social Democrats and the Greens had secured a compromise, primarily from the FDP, on the financial transaction tax (a levy that many politicians in Germany want to impose on financial markets in order to recoup part of the costs of any future crises), so that the federal government will now push the plan in nine European Union countries this year.

The delay in ratifying the ESM through the expected litigation did come as a surprise to many politicians in Berlin. In the Merkel camp, it is being perceived as one rude attack too many that Thomas Oppermann, a leader of the Social Democrats' parliamentary group, tried to hold the chancellor responsible for the delay, saying that she waited too long to address the ratification of the ESM. On his Facebook page, CDU General Secretary Hermann Gröhe, a close confidant of the chancellor, scoffed: "I think there's a catch here" and suggested that Oppermann have "a serious talk" with fellow Social Democrat Däubler-Gmelin. After all, the former justice minister is one of the expected plaintiffs in Karlsruhe.

Translated from the German by Christopher Sultan
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