The euro zone awaits key judicial judgment on September 12th


On September 12th the German constitutional court will issue a judgment on whether the European Stability Mechanism (ESM) for providing loans to euro zone member states in financial difficulty is permissible. The judgment could decide the future of the euro zone, with considerable implications for the future of the European Union itself.

The role of the German constitutional court

The German constitutional court has already in many instances responded to appeals against how the EU has developed and has both delayed and placed conditions on EU developments. Most notable was its judgment on the 1992 Treaty of Maastricht which, inter alia, paved the way for the single currency. The judgment was the last obstacle to the treaty coming into effect throughout the EU in 1993.

The court was given an important role in Germany’s Basic Law (effectively constitution), which came into force in 1949, following a conference of the eleven Länder (states) which had been previously established in the part of Germany then occupied by the UK, France and US.  It was extended by amendment to include five former East German Länder in 1990.

Parts of the Basic Law which cannot be changed by parliament

The Basic Law was formulated with a view to providing stable government and as much guarantee as possible that a takeover of the country by a party that does not respect human rights, as occurred in 1933, would never be repeated. A key clause is Article 79 (3), which states that changes to the rights of the Länder or to Articles 1 and 20 are inadmissible. And, since according to Article 79 (2), any other change can be made with approval by a two-thirds majority of the two houses of parliament, Articles 1 and 20 – plus the federal structure of government – must be considered as fundamental to the Basic Law.

The ESM was approved by much more than two thirds of each of the two houses of parliament and so, if the court decides it contravenes another article parliament could amend the Basic Law in order to impose its will.

Article 1 requires the German state to respect human dignity and human rights. There is a surprising ambiguity in Article 1 (3) which requires the organs of the state (government, legislature and judiciary) to respect “the following basic rights”, after which follow subsequent articles which are not specifically protected by Article 79(3) but appear to be implicitly protected. Moreover if the subsequent articles are implicitly protected, it is unclear how many subsequent articles are so protected. In fact Article 10 (privacy of post and telecommunications) and other subsequent articles have been amended. In any case, it would require a very far-fetched line of argument to claim that Article 1 is violated by the existence of a financial mechanism to hold together the euro zone.

Article 20 states that Germany is a “democratic and social state” and that “authority emanates from the people” through parliamentary elections (wahlen) and polls (abstimmungen). This clause – that power emanates from the people – is likely to be the most important one from the point of view of the constitutional court. With regard to the parliamentary form of representation, there is not any room for doubt given that the Bundestag, elected by proportional representation, and the Bundestag, representing the democratically elected governments of the Länder, both voted overwhelmingly for the ESM.

Could there be a first national referendum in the Federal Republic?

Abstimmengen could mean parliamentary elections, but since they are spelt out as an additional implied means of representation, it suggests the possibility of referendums. The Basic Law provides for referendums in a number of cases – but all relate to the individual Länder rather than the country as a whole. There had indeed, until recently, been a general assumption in Germany that national referendums were not part of its constitutional order, because they were seen as a potential tool of dictators. However, national referendums are not forbidden in the Basic Law, and opinion in the major parties is shifting towards the possibility of a referendum on European integration.

At this late stage, if the Constitutional Court were to demand a referendum on the ESM, it would seem to most outside Germany as an arbitrary move. Why should it come precisely at this stage after the EU and its predecessors had taken so many steps which make inroads on member states’ sovereignty over the last sixty years? The ESM was promoted by Germany itself as a more permanent continuation of the European Financial Stability Facility (EFSF) soon after the EFSF was set up in 2010. It differs from the EFSF crucially in being able to lend to troubled banks without adding to the liabilities of governments and being able to buy debt of Spain and Italy in the markets. However, such interventions will continue to be on very strict conditions, designed to ensure that the sovereign debts of Spain and Italy are repayable.

To recommend or require a referendum on the ESM would be highly controversial. However, it can be expected that the court will recommend a referendum should there be further major moves such as euro bonds which would greatly increase the sharing of the euro zone’s debt burdens.

Conclusions

Many of the arguments put to the German constitutional court are about loss of member state sovereignty, but the loss of sovereignty is, following the demands of Germany and other creditor countries, more severe towards those countries receiving loans that to those countries giving them. Germany has in fact constrained its own fiscal policy by placing a limit on the structural deficit of a minimal 0.35% of GDP from 2016.

Moreover, Article 23 (1), as quoted below, permits the Federation to transfer sovereign powers to the EU with the consent of the Bundestag. The court is likely to insist – as it has done before on the EFSF – that the German parliament is kept fully informed of developments in the negotiations at EU level. This makes it difficult for Angela Merkel to negotiate since it implies she has to make public whatever concessions she is prepared to make, the effect of which is for negotiating partners to assume such concessions have already been made. However, the constitutional court would surely go too far if it tried to constrain the will of the Bundestag and Bundesrat, which are elected directly and indirectly, in the name of protecting German democracy, especially as the aim of a united Europe is spelt out in the Basic Law.

The judgment will be eagerly awaited. It will be important, possibly crucially important for the future of the euro zone and for Germany’s role in the EU.