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Flash Analysis: What Will The German Constitutional Court Ruling Mean For The Eurozone?

Tyler Durden's picture


From Open Europe

What will the German Constitutional Court ruling mean for the eurozone?

Summary: Today, the German Constitutional Court ruled that the Eurozone’s permanent bailout fund, the ESM, and its ‘fiscal treaty’ on budget discipline do not violate the country’s ‘basic law’ and do not undermine Bundestag sovereignty over budget issues. However, the Court added a cap to the size of the ESM. It also reinforced the effective ‘veto’ of the German Bundestag over ESM activation, and therefore in effect also over a debtor country’s access to the ECB’s bond-buying programme (OMT), since the two are linked. However, the ruling was not unambiguous and in many ways an invitation to further court cases – over ECB bond-buying and others – and a lot more political wrangling.  


This decision merely referred to the question of whether to grant a temporary injunction against the ESM. The full ruling on the complaints is expected in early 2013. However, since the law can now be finalised, and as an international treaty may be difficult to reverse, many expect the final ruling to be along the same lines.

Key points:

  • Cap of €190bn on German ESM contribution, which can only be overturned by the Bundestag

  • Both houses of German Parliament need to be adequately informed about all ESM decisions – something which needs to be enshrined in “international law"

  • Reinforced that Bundestag approval needed for all activations of the ESM

  • Explicit ban on ESM borrowing directly from ECB

  • The German Government can terminate ESM at any time, as recognised under “customary international law”

  • In its full ruling, expected in early-2013, the Court will also consider whether the ECB’s bond-buying programme, the OMT, has transferred illegal degrees of sovereignty to the EU-level


Makes topping up ESM more difficult: The current lending capacity of the ESM, €500bn, is not nearly enough to take, say, Italy and Spain off the market, meaning that the cap could prove a real obstacle for large-scale Eurozone bailouts down the line. However, the impact of this could be offset by last week’s ECB decision to buy unlimited short-term government debt – via the OMT – which reduces reliance on the ESM. It is also worth considering that a situation where the ESM needed to be topped up, would mean the crisis had significantly worsened once again and an extra layer of parliamentary approval may be the least of the eurozone's worries.

Reinforcing Bundestag veto over ESM activation: The decision also reinforces that any future ESM bailouts will require parliamentary approval, stating that the Bundestag “must individually approve every large-scale federal aid measure on the international or European Union level.” Bundestag approval - either by the full chamber or a special committee - was already needed for activation of the ESM (as with the EFSF). The Court also called for both houses of the German Parliament – Bundestag and Bundesrat – to be kept fully informed of any ESM decisions, something which needs to be enshrined in “international law”.

Will the ESM Treaty need to be rewritten? The Court hinted that the cap on liabilities and the involvement of the Bundestag, will require changes to the ESM structure. If so, there are three ways this could play out:

1) German government protocol: The German government could insert the necessary changes into the German legislation implementing the treaty ahead of their signature into law by the German President Joachim Gauck.
2) Ratification in the Bundestag: German legislation on the ESM could be amended within the Parliament and then re-ratified and signed into law.
3) Rewriting of the ESM treaty: The entire ESM treaty must be altered to ensure that these requirements are laid out in the primary international legislation.

Clearly, (2) or (3) could cause further delays to the ESM coming into force, but are unlikely scenarios. In any case, this is again less of an issue since the ECB OMT can be activated using the EFSF, which will still have €150bn remaining following the Spanish bank bailout.

Ban on the ESM borrowing from the ECB: The Court says that “borrowing by the ESM from the European Central Bank” would be incompatible with EU law (Article 123 TFEU). This is a surprisingly categorical rebuke, especially over an issue of EU rather than German law. But given the ECB OMT a banking licence for the ESM is now less of an issue, so a negative market impact is less likely.


Focus shifts to ECB – but highlights that accessing the OMT could be difficult

With a firm cap on the ESM, the ECB is now most certainly the only actor with deep enough pockets to put Spain and Italy on life-support – together with the OMT announcement, the ruling has shifted the burden back to the ECB. However, the ruling and the role of the Bundestag highlights that activating the OMT will be challenging, since in order to qualify for ECB bond-buying, a country must first get funding from the ESM – and be subject to conditions. If the Bundestag agrees to activate more bailouts, it will most certainly push for harsher conditions than what debtor countries – most importantly Spain – are willing to accept. In the long-term, under current arrangements of linking ESM and OMT, the latter is also effectively capped and subject to a Bundestag veto.

The Court is likely to consider the ECB’s bond-buying programme next…

The GCC suggested in its press release that the ECB’s OMT will be considered in its final ruling on these complaints. The exact criteria upon which the programme will be assessed is unclear but broadly the Court will determine whether it transfers additional German sovereignty to the European level above and beyond that which the country has committed itself to in the EU Treaties.

Additionally challenges against the ESM could also be launched on similar grounds to the previous legal challenges against the Securities Market Programme (SMP) (inflationary tendencies thereby undermining the right of property by the owner of money, guaranteed by the German Basic Law, and distortion of capital markets). Like with the SMP, it is very unlikely that the GCC would rule against it.

…and expect more court cases

As the crisis piles on pressure for further EU integration – via a banking union and debt pooling – more court cases will inevitably follow. There are plenty of potential legal pitfalls ahead including: direct losses for Germany on loans to Greece, ECB losses on Greek exposure, pooling of risk through bank resolution fund and backdoor Eurobonds through the OMT.

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Wed, 09/12/2012 - 09:42 | 2785348 Debtonation
Debtonation's picture

It means:

Arbeit macht frei

Wed, 09/12/2012 - 09:43 | 2785358 Lost Wages
Lost Wages's picture

Stabeeleetee in action.

Wed, 09/12/2012 - 09:52 | 2785415 LongSoupLine
LongSoupLine's picture

It means the Euro is doomed...just not today.

Wed, 09/12/2012 - 10:11 | 2785529 CrashisOptimistic
CrashisOptimistic's picture

What most has my attention is the outright forbidding of the ESM from borrowing from the ECB.  This wipes out Timmy Geithner's suggestion that the funds be leveraged up.

It would also seem to guarantee that the amounts available won't be enough.  Relying on ECB short term bazooka lending doesn't look rational. 

Wed, 09/12/2012 - 11:36 | 2786044 CDSMonkey
CDSMonkey's picture

The ESM could borrow from other entities.  I don't think it wipes out the idea of leverage.

Wed, 09/12/2012 - 11:42 | 2786080 Nussi34
Nussi34's picture

Draghi´s Bazooka was turned into a water pistol!

Wed, 09/12/2012 - 10:30 | 2785677 insanelysane
insanelysane's picture

I must admit that I am shocked by how far the political machines (adminstative, legistative, and judiciary) are willing to go to try and maintain the status quo.  This extend and pretend could go on for years.  The machine believes that the situation is temporary and not a structural deformity of the system and if they can just keep it going, it will fix itself.  Gambers think the same way.  

Wed, 09/12/2012 - 11:25 | 2786006 odatruf
odatruf's picture

My thoughts exactly. I don't know why I allow myself to get my hopes up that someone, sometime is going to put a stop to this. Charlie Brown's football kicking passion has nothing on my foolishness.


Wed, 09/12/2012 - 11:51 | 2786073 trilliontroll
trilliontroll's picture

Aber wessen Arbeit macht wen frei ?

Wed, 09/12/2012 - 12:12 | 2786190 trilliontroll
trilliontroll's picture

Treaty of Versailles  (signed 28 June 1919) "... Article 231

The Allied and Associated Governments affirm and Germany accepts the responsibility of Germany and her allies for causing all the loss and damage to which the Allied and Associated Governments and their nationals have been subjected as a consequence of the war imposed upon them by the aggression of Germany and her allies.


Wed, 09/12/2012 - 09:44 | 2785361 docj
docj's picture

So in other words... they punted.

Do I have that about right?

Wed, 09/12/2012 - 09:49 | 2785397 GetZeeGold
GetZeeGold's picture



Brilliant really....everyone was expecting them to kick it.


Wed, 09/12/2012 - 10:37 | 2785725 boogerbently
boogerbently's picture

I think they squelched it, without looking like the "bad guys."

EU190 Billion won't do squat. It's like, why even bother. They placed a cap on Germany's involvement, who was expected (by the paupers) to basically foot the whole bill.

More EUROuncertainty, looming USD downgrade, great for gold. But will that be offset by a non-QE from Ben?

Wed, 09/12/2012 - 09:44 | 2785367 RobinHood73
RobinHood73's picture

its all for naught if the size is not precisely right. 190 billion might as well be zero if it isnt enough. The titanic sunk despite huge preventative design. It just wasnt enough.

Wed, 09/12/2012 - 10:37 | 2785724 Lohn Jocke
Lohn Jocke's picture

Don't navigate Icy waters. Just wait for global warming to clear the air...

Wed, 09/12/2012 - 11:27 | 2786010 odatruf
odatruf's picture

I disagree. They already established what they are; all that is left is setting the price.


PS - not my downarrow, Robinhood.

Wed, 09/12/2012 - 09:45 | 2785373 JJSF
JJSF's picture

The german taxpayer has a long way to go imo until they wake up and realize whats happening.




Wed, 09/12/2012 - 10:26 | 2785646 Sandmann
Sandmann's picture

Election Year 2013 promises to be interesting then.....this time next year by which time Spain and greece should have imploded.........the Dutch election at present......it might be that Germany has real indigestion long before that election

Wed, 09/12/2012 - 09:46 | 2785379 pods
pods's picture

Either way Europe is fucked.  Just like the rest of the indebted world.

More, better debt to make up for the not so good debt?  Right.

More, better debt means that when it blows, there is just more fuel (leverage) to make it spectacular.


Wed, 09/12/2012 - 09:47 | 2785384 Croatian Patriot
Croatian Patriot's picture

spirit of Yugoslavia?

Wed, 09/12/2012 - 09:50 | 2785395 Vincent Vega
Vincent Vega's picture

I read the entire article and still don't understand what the ruling means for the Eurozone. My basic take away is: heads bankers win; tails eveybody else loses.

Wed, 09/12/2012 - 10:00 | 2785461 clawsthatscratch
clawsthatscratch's picture



Wed, 09/12/2012 - 09:50 | 2785396 gojam
gojam's picture

The court still has to rule on the OMT.

Wed, 09/12/2012 - 09:54 | 2785427 The Reich
The Reich's picture

nuttin for banksta's cartell

Wed, 09/12/2012 - 10:14 | 2785542 Roland99
Roland99's picture

livin' in a banksta's paradise?

Wed, 09/12/2012 - 09:55 | 2785429 mayhem
mayhem's picture

bullish today... well at least this morning. bearish tomorrow.

Wed, 09/12/2012 - 10:42 | 2785753 boogerbently
boogerbently's picture

Gold up, miners down, DOW up, dollar down.....

no, wait, gold down.....

It's all on Ben!


Wed, 09/12/2012 - 09:56 | 2785441 Dareconomics
Dareconomics's picture

Spain Says No ‘Urgency’ to Seek Bailout as ECB Eases Yields - Bloomberg.

The Northern countries keep insisting on conditionality to bailout cash, and today's comments by Spanish politicians succinctly show why they are correct. Let's look at a chart of Spain's decreasing bond yields over the past few months:

Note the large decreases in fits and starts since Draghi told us that he would do whatever it takes to save the Euro in July.  What is important about this chart is that it shows that while yields have been decreasing, nothing has changed.

I realize that the ESM has jumped over its last hurdle and that the ECB has pledged to monetize the short-term debt of countries requesting a bailout. These initiatives are virtually meaningless, because the fundamentals have not changed.

To wit, Spain is now backing off seeking a bailout and is locked in a dangerous game of chicken with Europe:


Every country that has requested a bailout has thrown the party doing the requesting out of office. The problem with the bailout is not the free money from Germany; it is those pesky austerity conditions. What the promise of external help has done is remove the immediate reason, rising interest rates for its debt, for Rajoy's government to pursue deeper cuts and to seek a bailout.

If you examine Spain's current fiscal position, you will see that Spain cannot meet its financing needs for the rest of the year without external help:


But there's more. Spain is still in the midst of a depression caused by the bursting of its housing bubble. Housing prices have not even hit bottom yet. Unemployment is around 25%, and the economy is still shrinking. The entire banking system is going to need a bailout. Indeed, things have changed in the last few months; they have actually gotten worse.

In the spirit of self-preservation, I think that Rajoy will stick to his guns. Europe needs Spain to request a bailout as much as Spain does. His goal is to get bailout cash without the humiliation of having to sign a memorandum of understanding effectively ending his government.

If he could pull this off, it would be quite the coup. Of course, this action would also stoke resentment in the countries that have already gone through austerity and troika inspections. What will the reaction be in Greece, Portugal and Ireland if Spain gets it way?

Wed, 09/12/2012 - 10:26 | 2785652 Rip van Wrinkle
Rip van Wrinkle's picture

Don't worry about Ireland. Always thought their people had cojones. No longer. They'll simply bend over a bit more than they are already and be shafted.

Wed, 09/12/2012 - 10:01 | 2785464 luckylongshot
luckylongshot's picture

The deck chairs got rearranged on the Titanic, the German public lost €190 billion and none of the problems facing the Eurozone got solved.

Wed, 09/12/2012 - 10:02 | 2785468 Seorse Gorog fr...
Seorse Gorog from that Quantum Entanglement Fund. alright_.-'s picture

For 15 minutes, Karlsruhe became the Kourt of the Krimson Kings

Wed, 09/12/2012 - 10:03 | 2785473 magpie
magpie's picture

Willkommen in Super Mario Land. Collect 100 coins.


Wed, 09/12/2012 - 10:08 | 2785506 debtor of last ...
debtor of last resort's picture

Just another debt ceiling.

Wed, 09/12/2012 - 10:09 | 2785514 Sparky_ZA
Sparky_ZA's picture

If euro's will be printed, will America, China have t debase too? Shit never ends!

Wed, 09/12/2012 - 10:10 | 2785525 boiltherich
boiltherich's picture

It means that there will be a better chance for the euro skeptics to sink German participation via political means than through legal means.  Limits on the ESM just means the EU has to cook up some other new stew of acronymns and fund that instead.  But, who cares when the ECB is ready to intervene directly with unlimited bond buying? 

Wed, 09/12/2012 - 10:46 | 2785773 boogerbently
boogerbently's picture

....NOT with any German money!

Wed, 09/12/2012 - 10:12 | 2785535 SMFStreetTrader
SMFStreetTrader's picture

FOMC Ben Bernanke QE3 and How to Trade the Fed's Next Likely Move http://www.stockmarketfunding.com/Videos/Stock-Futures/FOMC-Ben-Bernanke...

Wed, 09/12/2012 - 10:14 | 2785545 Carl Spackler
Carl Spackler's picture

The euro can continues o get kicked down the road in this political "game of chicken."

Clearly, the Germans poliical class just doesn't want to be viewed as "the straw which broke the Euro camel's back."


Wed, 09/12/2012 - 10:18 | 2785581 sosoome
sosoome's picture

job security for lawyers

Wed, 09/12/2012 - 10:19 | 2785585 zen0
zen0's picture

What the courts do, both in Europe and the USA, is to come up with language to circumvent the clear language of black letter law.


--Vox Day

Wed, 09/12/2012 - 11:29 | 2786020 odatruf
odatruf's picture

There isn't much black letter law out there. Providing wiggle room has been baked into the cake since 1787.

Wed, 09/12/2012 - 10:22 | 2785609 Seasmoke
Seasmoke's picture


Wed, 09/12/2012 - 10:46 | 2785782 darkpool2
darkpool2's picture

The devil is ALWAYS in the details.

Wed, 09/12/2012 - 10:46 | 2785787 Sudden Debt
Sudden Debt's picture

Why cap it if it doesn't violate anything?

It's like calling rape not a rape if the rapist doesn't put his whole dick in the volunteering victim's pussy!

Wed, 09/12/2012 - 20:26 | 2787899 Colonel Klink
Colonel Klink's picture

Yeah but according to one politician here, the body has a way of rejecting it and not getting prego.

I just keep waiting for the national body to reject the rape being forced on it by the banksters.

+1 SD.  I always enjoyed reading your comments on Marketwatch.  It's where I woke up, between reading the article and the comments.  Linked to ZH close to 4 years ago when I woke up.

Wed, 09/12/2012 - 10:48 | 2785795 intric8
intric8's picture

Ha. They are kicking the can so far down the road that they'll drop dead before they can get there to kick it again.

Wed, 09/12/2012 - 11:01 | 2785889 yogibear
yogibear's picture

Just increase the retirement age for Geman citizens. Germans are very tolorant of having tyrants and fascist.  Hitler proved that. Germans just nod their heads and agree. 

Wed, 09/12/2012 - 11:15 | 2785965 hedgehog9999
hedgehog9999's picture

"Bundestag and Bundesrat "

great names!!

Democ-rats would be the closest thing in US politics....

Wed, 09/12/2012 - 11:36 | 2786053 CDSMonkey
CDSMonkey's picture

well balanced and useful article

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