EU: German Constitutional Court Ruling

Despite a backdrop of popular discontent in Germany against Euro-zone bailout, Germany’s Constitutional Court has upheld the legality of the Euro-zone financial rescue packages.

“This was a very tight decision.  But it should not be mistakenly interpreted as a constitutional blank check authorizing further rescue measures.” – Andreas Vosskuhle, president of the second chamber of the Constitutional Court in Karlsruhe

The Judgement amounts to an important victory for the German government, but the Karlsruhe court also ruled that in the future the budget committee of the Bundestag must give prior approval of any future negotiations over future crisis measures taken by Germany.  This could complicate future negotiations over future crisis measured by reinforcing the parliamentary control of the Bundestag.  This means that new bailouts could take more time to ab agreed upon and the rescue fund, the European Financial Stability Fund, could be slower to wield its new powers.  In order to stay ahead of market developments, the Euro-zone governments need to act quickly; therefore, the recent ruling will be controversial and crucial during its enforcement.  Nonetheless, the ruling lifts a cloud over the 110bn Euro rescue package agree last year for Greece and the 440bn Euro European Financial Stability Facility (EFSF) which will be used to provide further financial assistance for both Ireland and Portugal.  Hopefully, the ruling will also allow the German parliament to approve the extension of the powers of the EFSF and ensure the implementation of the European Stability Mechanism in 2014.

“Today’s ruling should bring some relief to financial markets as a total chaos scenario has been avoided but it should not lead to euphoria.” – Carsten Brzeski, senior economist at ING Belgium

In conjunction, the ruling has taken a step toward a more democratic European Union, a more integrated entity, but much of this pressure is being laid at the feet of the Germans…again.  The new package for the EFSF would allow it to use its funds to buy sovereign bonds in secondary markets, issue precautionary liquidity loans to euro-zone members, as well as recapitalize banks in difficulty.  Along with the European Stability Mechanism (ESM), the groundwork for a central financial authority can be seen, though somewhat blurry.  Yet the stake of the German guarantee for th EFSF has increased from 123bn Euros to 211bn Euros, approximately $300 billion.  With growing unrest and anger from Euroskeptics, Chancellor Merkel faces a grueling three weeks to win back her own CDU supporters.

On Monday, an inter-party rebellion of sorts illustrated the division within the Christian Democrat group, in which 19 members fo the CDU defied Merkel’s appeal for parliamentary support.  This was also seen in the Free Democratic party in which 6 members defied Merkel as well.  The German government has argued that the emergency measures taken were necessary to ensure the stability of Europe.  Nonetheless, rhetoric has yet to appease the populace.  On Sunday’s vote in Merkel’s home state of Mecklenburg-Vorpommern, the Social Democratic party won a concise victory of the votes, 35.7% of the vote compared to Merkel’s CDU results at 23.1%.

“The union shall not be liable for or assume the commitment of central governments, regional, local or other public authority, other bodies governed by public law, r public undertakings of any Member State.” – Article 125 of the Treaties.

Under the statement, the EU’s legal position clearly backs away from any bailouts.  However, the Bundersverfassungsgericht (Germany’s Federal Constitutional Court) has upheld such breaches of the treaty.  The developments mark a step away from what the law says and to what it should say.  This marks a potential step forward to the needed reform of the EU system, a reform away from zealous sovereignty that has impeded central authorities from regulating the financial and regulatory practices of the Member States.  As a supranational community, the regulatory system should not be intergovernmental; rather, the authority ought to be under the supervision and management of an organization based in Brussels, like everything else EU related.

Moreover, to combat Euroskeptics and general nay-saying by the international community, the German government has argued that the rescue package and the establishment of the EFSF were emergency last resorts and were necessary for the stability of the Euro; therefore, they are compatible with both EU treaties and the German constitution. As the leading country for the EU, as well as the source for most investment in indebted nations like Greece, the rally of the German government to protect the EU has solidified the resolution of Germany to ensure the survival of the EU.  With recent European markets on a continuous decline, the court ruling brought the financial markets out of their trend and did bring a degree of rise.  The STOXX Europe 600 banking Index .SX7P was up 3.3% and Greek banks. FTATBNK rose 6.5%, a sharp rise from a two-year closing low.  The Euro also rose against the dollar today, though the single currency will remain vulnerable ahead of the European Central Bank’s rate decision on Thursday.

In retrospect, the efforts by major powerhouses of the EU, Germany, will bring the EU forward but the last efforts of reform will have to be made by the ailing nations, such as Greece and Italy.  Doubts about the will of Italy and Greece to push through the austerity demanded by their partners have darkened the political mood in Europe.  Such pressure has forced the ECB to intervene by buying Italian bonds to ensure the stability of their borrowing rate, but the trend cannot persist and Italy must refrain from becoming another Greece.   The EU is vulnerable to intergovernmental fallibility and as Member States, the indebted nations must make their own sacrifices and efforts for the common good of the Euro-zone.

Advertisements

2 responses to “EU: German Constitutional Court Ruling

  1. That decision is a real shame. Angela Merkel thinks and acts as if it was her own money. We can’t expect any good decision by any federal court anywhere whatsover. The german people is being screwed by his own government.

    • The problem is above Merkel. I believe that she underestimated the extent of the problems facing the Euro-zone. For these reasons, she prepared quick counterattacks to the problems, throwing as much money and regulatory processes as she could to balance the indebted nations. The problem is that it was too far gone.
      Now, she is taking steps toward creating a more cognitive authority to regulate a supranational fiscal system. Germany has been taking this responsibility since the on-start of the problems. Thus, Germany has been heavily invited in failing countries and the ineffectiveness of Germany’s measures as only increased its role in ensuring the unity and future of the EU. If Germany were to fail in its actions now,all of its efforts and investment will lead to failure on multiple levels.
      Merkel has realized this and is targeting the problems as steadfast and courageously as she can manage but the problems of Greece, Italy, Spain, Ireland,and Portugal are beyond the means of Germany. This is why the German populace is so angry. Their sacrifices are not being reciprocated by the nations that ought to do so. The move to involve the Bundestag is an attempt to involve the people more, which may prove problematic because of the division of society on the issues. Nevertheless, the EU and all Member States must be transparent in order to be a true democratic union. These steps could be a precursor to such a future.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s