Explaining The German Constitutional Court Ruling

European reformist think tank, Open Europe, which has so far been spot on in its very skeptical assessment of the drunken, meandering rumble that various European authorities have engaged in over the past two years to mask that the EUR is predicated by a failed and discredited model, has released its comprehensive assessment of today's German Constitutional Court ruling. For anyone even remotely close to trading the EUR pairs, or their derivatives: stocks and bonds, this is a must read. In a nutshell: "Giving the Bundestag’s Budget Committee the final say over the use of the bailout fund is welcome from a democratic point of view, but will add another element of uncertainty to the eurozone crisis. However, so far the Budget Committee has consistently taken the government line on the bailout, albeit reluctantly, and it remains to be seen whether it dares to exercise its new power. The calls for the whole Bundestag to have a greater say in the dispersion of financial aid are, therefore, likely to continue.... the wording used by the Court also seems to suggest that joint debt in the eurozone could be constitutionally allowed if it involved a stronger German say over other member states’ fiscal policies. This could set Europe up for a major clash of national democracies in future, should Eurobonds be deemed necessary to hold the Single Currency together in the long term. Controversially, the Court did not give an opinion on the legality of the ECB’s bond purchase programme – despite the potential implications this programme has on price stability and the ECB’s independence. This unsettling question is likely to resurface in future." Expect this court to feature far more prominently in the months to come.

Full report:

Open Europe responds to German Constitutional Court ruling

Open Europe has today responded to the German Constitutional Court ruling against the claims that the eurozone bailouts are illegal. As expected, the Court ruled that the eurozone bailouts are compatible with German Basic Law, since, according to the Court, they do not provide an excessive burden on the German budget, do not constitute a significant transfer of power away from the Bundestag nor impact negatively on the euro’s purchasing power, as had been suggested by the claimants. However, the Court also gave the Bundestag’s Budget Committee an effective veto over future activation of the eurozone’s bailout fund, the EFSF, and reinforced German constitutional restrictions on the introduction of Eurobonds.

Open Europe Economic Analyst Raoul Ruparel said,

“Giving the Bundestag’s Budget Committee the final say over the use of the bailout fund is welcome from a democratic point of view, but will add another element of uncertainty to the eurozone crisis. However, so far the Budget Committee has consistently taken the government line on the bailout, albeit reluctantly, and it remains to be seen whether it dares to exercise its new power. The calls for the whole Bundestag to have a greater say in the dispersion of financial aid are, therefore, likely to continue.”

“The ruling also seems to further entrench the German government position that Eurobonds are a no-go, by warning that Germany should not assume other countries’ liabilities. However, the wording used by the Court also seems to suggest that joint debt in the eurozone could be constitutionally allowed if it involved a stronger German say over other member states’ fiscal policies. This could set Europe up for a major clash of national democracies in future, should Eurobonds be deemed necessary to hold the Single Currency together in the long term.”

“Controversially, the Court did not give an opinion on the legality of the ECB’s bond purchase programme – despite the potential implications this programme has on price stability and the ECB’s independence. This unsettling question is likely to resurface in future.”

What did the Court say?

Although finding the complaints non-substantive, Chief Justice Andreas Voßkuhle stressed that the verdict “should not be misinterpreted as a constitutional blank-cheque for further aid-packages”.

The Court also ruled that, in order to conform to the constitution, “the Federal Government is in principle obliged to always obtain prior approval by the [Bundestag] Budget Committee before giving guarantees.” This gives the committee a significant role in the approval of any future use of the EFSF, the eurozone’s bailout fund, a marked change from the current situation where it can only give a non-binding opinion on the issue.

Additionally, the Court also flagged up some red lines over any future mutualisation of debt. The Court’s press release states that, “The Bundestag, as the legislature, is also prohibited from establishing permanent mechanisms under the law of international agreements which result in an assumption of liability for other states’ voluntary decisions, especially if they have consequences whose impact is difficult to calculate.” This seems to suggest that any move towards Eurobonds would be unconstitutional, even with agreement from the Bundestag. However, the phrasing of the statement does also hint that if Germany were to have a greater say over the fiscal policies of other states, where it had assumed a liability, then in fact, it may not be unconstitutional. The full implications of the ruling, however, still remain unclear.

To read Open Europe’s preview briefing on the ruling – which reflects the content of the actual verdict, click the link below:
http://www.openeurope.org.uk/research/Karlsruhefactor.pdf


And for a totally different argument, here is Goldman's take:

A qualified 'yes' to the EFSF from Germany's Constitutional Court

As widely expected, Germany’s Constitutional Court rejected complaints against aid measures for Greece and the EFSF on the basis that it saw "no violation of the Bundestag’s budget authority" as the measures would not "establish or consolidate an automatism by which the Bundestag would relinquish its right to adopt the budget and control its implementation by government". In addition, the court did not specify an upper limit for the total guarantees that can be provided. Thus, a further increase in the EFSF would be possible from a constitutional point of view (although politically it could prove difficult to obtain approval for them). Note, however, that the court also said that limits exist to the extent to which the Bundestag may forgo its budgetary autonomy. We would interpret this statement as implying that the court would have clear reservations about an outright collectivisation of government debt, for example in the form of Eurobonds.

However, the court qualified the measures by saying that "every larger-scale aid measure of the Federation taken in a spirit of solidarity and involving public expenditure at an international or European Union level must be specifically approved by the Bundestag. Sufficient parliamentary influence must also be ensured with regard to the manner in which the funds that are made available are dealt with". Specifically, the court ruled that "the Federal Government is in principle obliged to always obtain prior approval by the Budget Committee before giving guarantees" and that today’s ruling “is not a carte blanche for future help packages”.

The Bundestag will need to specify in the EFSF law (currently under discussion) whether this means that the budget committee will have to approve not just an increase in guarantees and new programs but also every disbursement under existing programs and debt purchases in the secondary market. Given the overall mood among coalition MPs, we think that the Bundestag will want a rather broad participation of the budget committee in this process, even if it is not strictly required by the Constitutional Court ruling.

All else equal, this would make the approval process more cumbersome and increase the risk that the budget committee would at some point reject a decision taken by the EFSF’s board. At the same time, approval by the whole Bundestag – and not just the budget committee – would make the process even more difficult - indeed, potentially a lot more difficult. Thus, we still think that today’s ruling does not significantly reduce the EFSF’s overall effectiveness. After all, it will be much easier for the government to gain a sufficient majority in the budget committee than in the whole Bundestag. Note also that approval by the budget committee can be given ex post if the circumstances make this necessary.

Overall, the ruling was broadly as expected. The next hurdle will be the vote in the German parliament on September 29 on the second Greek package and the expansion of the EFSF.