German Policy Watch

September 12, 2012

Constitutional Court Ruling: Green light for ESM with two important conditions

• On 12 September, the German Constitutional Court dismissed six constitutional complaints against the German ratification of ESM and the Fiscal Compact. With two important caveats, the way for the German ratification of ESM is clear.
• The Court has again increased the power of the German Bundestag: Germany may ratify the ESM Treaty if it is ensured under international law that (1) the Bundestag has to approve any additional payment obligations than those being defined in the ESM Treaty (2) issues of immunity and secrecy may not conflict with information obligations to the Bundestag.
• It is not fully clear, though, at this stage, what is required to satisfy the Constitutional Court’s pre-conditions. As of today, the prevailing view is that a unilateral protocol by the German government stating that Germany would not regard itself as being bound to the ESM Treaty if the conditions turned out to be ineffective will be sufficient.
• The Court will deliver its final verdict in the next months. And it will also deal with the ECB’s involvement on secondary bond markets. Most likely, it will make a reference to the European Court of Justice.

On 12 September, the German Constitutional Court passed its judgment on six constitutional complaints and requests for temporary injunctions that were filed against the German ratification of ESM and the Fiscal Compact. As the German ratification of ESM depends on the judgment of the Court on the complaints against the ESM and its German by-laws, the parts of the judgment covering ESM are of particular interest.

The Judgment: Two conditions

The Court ruled that Germany may only ratify the ESM-Treaty if at the same time it is ensured under international law that

1. without the agreement of the German representative no provision of the ESM-Treaty may be interpreted in a way that establishes higher payment obligations for Germany than those defined in Annex II (currently EUR 190 bn).

2. the execution of the ESM Treaty's articles 32.5 (immunity of archives and documents), 34 (professional secrecy), and 35.1 (immunity of staff) may not conflict with the obligation to provide comprehensive information to the Bundestag.

According to the Court, the Federal Republic of Germany must explicitly express that it cannot be bound to the ESM Treaty any more if the aforementioned conditions turned out to be ineffective.

Assessment

The first condition that binds the maximum threshold of German guarantees to the Bundestag’s assessment has far-reaching consequences:

• It blocks any potential plans to issue ESM shares above par in order to trespass the maximum threshold of payment obligations for Germany, as suspected by Euro critics in Germany.
• Irrespective of that, the Court has again increased the power of the German Bundestag: Making the ratification permanently conditional on the involvement of the Bundestag, the risk of the German legislature being overruled by ESM decisions (which rank higher than national law in Germany) has been mitigated.

It is now up to the German government to ensure that two conditions are fulfilled when ESM is ratified. The most crucial is the term “if at the same time it is ensured under international law”. That means that a mere political statement by all euro area countries that would explicitly respect the two conditions made by the Court would not be sufficient.

It is not fully clear, though, at this stage, what is required to satisfy the Constitutional Court’s pre-conditions. In principle, the pre-conditions could either be fulfilled by a unilateral protocol, passed by Germany in the ratification process and accepted by the other signatories, or a multilateral protocol, or even a change of the ESM Treaty. These alternatives obviously differ with respect to their impact on easiness and speed of final ESM ratification.

As of today, the prevailing view is that the first course – a unilateral protocol by the German government stating that Germany would not regard itself as being bound to the ESM Treaty if the conditions turned out to be ineffective – will be sufficient to satisfy the Court’s conditions. But, while this is, in our view, too, the most likely outcome, this interpretation is subject to a confirmation by the German government.

The second condition – i.e. a comprehensive information obligation vis-à-vis the Bundestag could increase document leakages on ESM’s operations in the future. That suggests a limitation of the target group within the Bundestag towards either the budgetary committee or the Group of the Nine – a committee that is already confidentially informed on EFSF’s and ESM’s secondary market activities. In order to further flesh out the provisions on information-sharing with the Bundestag and to name committees and responsibilities, another change in the German by-laws in the upcoming weeks cannot be ruled out.

OMT: Major questions still open

In addition, the Court emphasized that the OMT of the ECB does not have any bearing on the question on whether Germany's involvement into ESM is constitutional or not. It remarked that it will review the role of the ECB and whether it had exceeded its authority in the main proceeding that has not yet been scheduled but will most likely take place by the end of this year. Already in its judgment on 12 September, the Court emphasized that bond purchases on the secondary market that aim at budgetary financing independent from capital markets, is explicitly prohibited by European law.

For the remainder of the legal proceedings, that leaves some uncertainties as to whether the Court will, in the end, deem the recently pragmatic stance of the ECB to be constitutional. While the Court has stated many times in the past that it will refrain from interpreting any economic assessment on the potential effects of unconventional monetary policy measures, it could well comment on the consistency of the ECB’s policy with the European treaties. It could make a reference to the European Court of Justice. In any case, the ongoing proceedings will remain under the markets’ observation.

Irrespective of the judgment on 12 September, we can be sure that these will not have been the last constitutional complaints on Europe that Karlsruhe will have to address, as the complainants, if past action is any guide, will most probably file further complaints against any other forthcoming EU-related legislation.

Author:
Nicolaus Heinen +49 69 910 31713, nicolaus.heinen@db.com