Barking vs. Biting: Understanding the German Constitutional Court’s OMT reference … and its implications for EU Reform

lindsethProf. Peter Lindseth

I find myself in familiar territory.  Just as with the ESM Ruling of September 2012, some of the insta-commentary on a decision of the German Federal Constitutional Court (GFCC) on the Eurozone crisis calls for a response. At issue in September 2012 was the claim that the GFCC’s refusal to issue a preliminary injunction against the European Stability Mechanism (ESM) was evidence of “the Court’s weakness in EU matters.” At issue now is the idea that the Court’s decision this past Friday to refer a question to the CJEU – on the compatibility of the ECB’s OMT program with the treaties – is somehow an “abdication,” indeed “nothing less than a surrender of sovereignty by Germany’s highest court.”

Commentators much closer to as well as more knowledgeable of these matters have already weighed in on this over-reaction. I’d still like to offer some additional reflections, not merely to add what I hope will be some context to Friday’s decision, but also to shed some light on the Court’s strategy in the “game” in which it inescapably finds itself. Finally, I’d like to suggest that the Court’s ruling has major implications for the process of EU reform that David Cameron has been struggling to energize. As I’ll explain in the conclusion to this post (apologies in advance for its length), it is hard to envision any outcome of Friday’s decision that will not compel the Angela Merkel’s government to undertake reform, including treaty changes.  This presents an opportunity for the British government but only if it’s prepared to accept that European reform must include not merely “less” Europe, but also “more,” including possibly an expanded mandate for the ECB to explicitly embrace OMT.

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On the ‘Administrative, not Constitutional’ Legitimacy of European Integration (Theoretical)

lindsethProf. Peter Lindseth

In keeping with my recent emphasis on spreading my views the old fashioned way – through scholarly papers, book chapters, and the like (see, e.g., here) – I’ve posted a new piece as part of the Jean Monnet Working Paper Series at NYU Law School that may be of interest to some readers. Entitled “Equilibrium, Demoi-cracy, and Delegation: On the ‘Administrative, not Constitutional’ Legitimacy of European Integration”, the piece builds on a very different paper I submitted as part of the symposium “Toward a Multipolar Administrative Law: A Theoretical Perspective” at NYU last year.  For those interested, the current version of the paper can be downloaded here and the abstract is immediately below.

To argue, as this contribution does, that European integration enjoys an “administrative, not constitutional” legitimacy is to take a position in obvious tension with the deeply-rooted conceptual framework—what we might call the “constitutional, not international” perspective—that has dominated European public-law scholarship over many decades. Rather than viewing the administrative alternative as an outright rejection of all that has come before it, however, one can in fact see it as providing the legal-historical micro-foundations for certain better-known theories of European legal integration. I am referring in particular to Joseph Weiler’s classic theory of European “equilibrium” (now updated as “constitutional tolerance”), as well as Kalypso Nicolaϊdis’s more recently developed “demoi-cratic” theory of European governance (on which this contribution focuses in particular). The central idea behind the administrative interpretation—the historical-constructivist understanding of “delegation” and the essential balance it demands between supranational regulatory power and national democratic and constitutional legitimacy—directly complements both theories. This alternative interpretation suggests how the balance between the national and supranational, as well as the nationally mediated legitimacy that is essential to integration’s sustainability, in fact have their origins in the historical evolution of administrative governance over the course of the twentieth century. Integration’s grounding in the history of administrative governance helps to explain certain crucial but often overlooked aspects of European public law, most importantly the role of oversight by national constitutional bodies—executive, legislative, and judicial—in the legitimation of the integration process.  Moreover, the administrative perspective also provides helpful insight into how the theories of European “equilibrium” and “demoi-cracy” might be legally operationalized in service further European reform, particularly in the context of the still-unresolved Eurozone crisis.

The Eurozone Crisis, Institutional Change, and “Political Union”

PL photoProf. Peter Lindseth

I’ve been on a bit of a blogging hiatus these last several months because of both administrative duties and the professional obligation to disseminate my views the old-fashioned way, via scholarly articles, book chapters, and the like.  One of those efforts has just appeared in a new (and free) e-book, Political, Fiscal and Banking Union in The Eurozone?, now available from the FIC Press, the publishing arm of the Financial Institutions Center at the Wharton School at the University of Pennsylvania.  My contribution, ‘The Eurozone Crisis, Institutional Change, and “Political Union”’ (pp.147-61), builds on some ideas I previously published on this blog here.  The publisher’s blurb for the book is below and the full book may be downloaded here free-of-charge.

The European University Institute (EUI) and the Wharton Financial Institutions Center (FIC, Wharton School, University of Pennsylvania) organised a conference entitled “Political, Fiscal and Banking Union in the Eurozone” at the EUI in Florence, Italy, on 25 April 2013. The event was financed by the PEGGED project (Politics, Economics and Global Governance: The European Dimension) and a Sloan Foundation grant to the FIC. The conference brought together leading economists, lawyers, political scientists and policy makers to assess the prospects and potential for, as well as obstacles to, the various forms and degrees of integration needed within the Eurozone in order to address the root causes of Europe’s current malaise. The aim was for open discussion and debate on the relationships between these different levels of union. Was one type of union achievable without the other? Or would the intractable difficulties of achieving each level of union spill over to lessen the chances of the other ever being a likely practical possibility?

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Both ‘More Europe’ and ‘Less’: Some Thoughts on ‘Political Union’ and the Eurozone Crisis

lindsethProf. Peter Lindseth

Below is an excerpt of remarks that will be delivered at the conference ‘Political, Fiscal, and Banking Union in the Eurozone?’, taking place on April 25 at the European University Institute. EUI’s Department of Economics, the Robert Schuman Centre for Advanced Studies, and the Wharton Center for Financial Institutions at the University of Pennsylvania are the conference co-sponsors. Prof. Lindseth will take part in ‘Panel 3: Political Union in the Eurozone?’

The conference organizers have asked me to reflect on various possible meanings of ‘political union’ and whether there might be a tension between ‘de jure’ and ‘de facto’ dimensions of the concept. More specifically, they asked me whether there might exist any ‘barriers to real political union within the Eurozone and what the sources of those barriers might be’. Continue reading

Cyprus … or Why the ‘No-Demos Problem’ Defines the Policy Response to the Eurozone Crisis

lindsethProf. Peter Lindseth

Mervyn King’s now almost legendary quip about the global financial crisis—that global banks are ‘international in life, but national in death’—applies with even greater force to the Eurozone crisis.  And the consequences are increasingly devastating for European Monetary Union (EMU), as the unfolding drama in Cyprus well demonstrates.

In each stage of the Eurozone crisis—Cyprus simply being the most recent—we have been reminded that Europe’s banks, while purportedly ‘European’ in life (and allowed to grow, regardless of location, to an apparently ‘European’ scale), are very much national in their agonistic struggles to survive, ultimately dependent on national resources (or, in the case of Cyprus, also their depositors themselves).  When viewed relative to national resources—that is, access to capital to resolve/recapitalize or even just to insure deposits—many Eurozone banks (not just those in Cyprus) are potentially bloated and dangerous monstrosities, posing huge systemic risks to the EMU as currently constituted. Bailouts coming from the likes of the EFSF or ESM—channeled as they are through national governments, subject to strict conditionality—do not change this conclusion.  In fact, by ending up on national balance sheets and thus massively expanding national debts, these ‘bailouts’ only exacerbate the problem.

European leaders stated last June that they wanted to break the ‘the vicious circle between banks and sovereigns’.  Ever since, however, the core countries have done seemingly everything they could to perpetuate the ‘sovereign-bank link’.  Their actions have ensured that the entire cost of the EMU’s flawed design is born by the countries in the periphery, via austerity, the expansion of national debt, and now potentially the destruction of peripheral banking through depositor bail-ins and capital controls. There has, in other words, been no recognition of the fault that all Eurozone countries share in the flawed design of the EMU, or of the concomitant obligation to pool resources to solve the devastating problem of ‘legacy costs’.  Therein—as the innumerable advocates of a genuine European banking union have pointed out—lies the true heart of the Eurozone crisis. Europe will apparently get some kind of single regulatory supervisor for at least part of its banking sector.  But what it really needs, as so many recognize, is a common resolution mechanism and deposit guarantee scheme backed by the full fiscal capacity of the Eurozone as a whole (i.e., unshackled from the limitations of any single member state).

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The Cyprus Bailout, Deposit Guarantees, and the Single Market (Updated)

lindsethProf. Peter Lindseth

 [This is a slightly updated and modified version of a post that appeared on europaeus|law over the weekend.  It is cross-posted here with permission.]

We’re all monitoring the intense fallout from the announcement by the Eurogroup that the Cyprus bailout will be conditioned on an “upfront one-off stability levy” on deposits in Cypriot banks.  The levy – 9.9% on bank deposits exceeding 100,000 euros and 6.7% on anything below that – will take place on Tuesday after a bank holiday on Monday.

There will no doubt be much more to be said about this in the coming days and weeks, but we note the general expectation that the levy, as structured, will hit small depositors in Cyprus banks especially hard.  Moreover, we want to point out the potential impact that the bailout conditions will have on the single market, notably harmonized deposit guarantee schemes.  As Open Europe asked on its blog:

Does this move break EU rules on capital controls and/or deposit guarantees? As noted above, it seems that depositors will be blocked from withdrawing their funds from banks. For other EU depositors this surely amounts to a form of capital control – strictly forbidden under the EU Treaty. Furthermore, as Sharon Bowles MEP has been tweeting, this move makes a mockery of the current EU rules on deposit guarantees below €100,000. The Eurozone may protest that the bank shares given in exchange are of the same value, but this is a very thin argument. Either of these issues could be challenged at the European Court of Justice.”

Bowles, a Lib-Dem MEP and chair of the EP’s Economic and Monetary Affairs Committee, has now issued a press release entitled “The Cyprus bailout deal is a disaster for EU rules andSingle Market principles“.  She writes:

“This grabbing of ordinary depositors’ money is billed as a tax, so as to try and circumvent the EU’s deposit guarantee laws. It robs smaller investors of the protection they were promised. If this were a bank, they would be in court for mis-selling.

“The lesson here is that the EU’s Single Market rules will be flouted when the Eurozone, ECB and IMF says so. At a time when many are greatly concerned that the creation of the ‘Banking Union’, giving the ECB unprecedented power, will demote the priorities of the Single Market, we see it here in action.

“Deposit guarantees were brought in at a maximum harmonising level so that citizens across the EU would not have incentive to move funds from country to country. That has been blown apart.

“What else will be blown apart when convenient? All the capital requirements we have slaved over, what about the new recovery and resolution rules? What does this mean for confidence in cross-border banking and resolution and preventing the fragmentation of the banking sector?

“When the dust has settled on this deal, which I hope it never does, we will see that the Single Market has been sold down the river for a shoddy price. All the worse as the consequences for Cyprus of the Greek bond haircuts were obvious.”

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Breaking the Sovereign-Bank Link…Not

Prof. Peter Lindseth

This can be brief. Readers may recall how, with great fanfare, the June 2012 European Council Summit (or, more specifically, the Euro Area Summit) announced that it was ‘imperative to break the vicious circle between banks and sovereigns’. This raised the possibility that the European Stability Mechanism (ESM) might be used to recapitalize distressed banks, an idea that the summit conclusions specifically discussed. Peripheral countries were obviously overjoyed at the prospect that they might be relieved on the fiscal burden of recapitalization, thus breaking the dreaded ‘sovereign-bank link’ that were driving them into insolvency.

As many readers know, disappointment soon followed.  In a joint statement in September (previously discussed on this blog here), the finance ministers of Germany, the Netherlands, and Finland made clear that, in their view, ‘the ESM can [only] take direct responsibility of problems that occur’ after a country has relinquished fiscal control under an ESM bailout and supervision memorandum. Otherwise, ‘legacy assets should be under the responsibility of national authorities’.

So the announcement this week, that Eurozone finance ministers are considering whether to cap the total amount of direct assistance for bank recapitalization at €80 billion, should probably not come as a surprise.  As Reuters reports:

German Finance Minister Wolfgang Schaeuble said the ESM should ideally not be used at all and stressed that funds for banks were limited already.

“The ESM is primarily there in order not to be used, but to create confidence, and for that it needs a certain level of lending capacity,” Schaeuble told reporters after a meeting of euro zone finance ministers.

“Therefore what can be used for banking capitalisation is limited anyway, especially as we know that the funds used for banking recapitalisation must be backed by more capital.”

Commenting on a similar report in the FAZ, Wolfgang Münchau noted on his newsletter (alas, sub. req.): Schaeuble’s position ‘contains a whole number of outrages. It is clear, by now, that the June EU summit’s statement to separate the sovereign and banking risks is currently being turned into a straight-forward lie …. An €80bn allocation could be used up by a single bank rescue’.  Little more need be said, apart from quoting a previous statement by Münchau in the FT last week, noting ‘the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures’.

Interdependence, Political Will, and Morality: Banking Union Version

10-lindseth-008 (cropped  touched)Prof. Peter Lindseth

In reflecting on the muddled and (to many observers) disappointing outcome of last week’s European Council summit on banking union—‘yes’ to a not-insignificant Single Supervisory Mechanism (SSM) within the European Central Bank (ECB) but ‘no’ to any significant fiscal shock absorber in the form of resolution fund or common deposit-guaranty scheme—I couldn’t help but think of the late, great Alan Milward, perhaps the most influential of all historians of European integration.

As many readers will know, Milward was the author of the classic history of the origins of the integration process, The European Rescue of the Nation-State (1992; 2d. 2000).  And it was Milward, perhaps more than any other observer of European integration, who consistently reminded us that integration has always been a political choice rather than an inexorable consequence of growing ‘interdependence’ or some of other functional factor.  Because integration has been a political choice, its direction has also never been beyond political negotiation or even outright resistance or rejection. This insight is important to keep in mind as we reflect on the outcome of last week’s summit on banking union.

Compelling functional demands, such as managing interdependence or maintaining Europe’s geopolitical influence on the global stage, undoubtedly feed the process of European integration, Milward acknowledged.  But these demands do not necessarily determine the course of integration in a linear, strongly causal sense. Explanations of the process relying primarily on such functional explanations, most importantly the growing interdependence of the European economy, were, from Milward’s historical perspective, ‘shallow and implausible’ (ERNS, p.7).   Continue reading

Thoughts on the Maduro Report: Saving the Euro Through European Democratization?

Prof. Peter Lindseth

Miguel Poiares Maduro, former AG on the CJEU and now holder of a joint chair at EUI and the Robert Schuman Centre for Advanced Studies in Florence, is hosting an online discussion as part of the RSCAS Global Governance Programme, which he also directs.  The focus is a report prepared by Maduro for the European Parliament’s Committee on Constitutional Affairs, entitled ‘A New Governance for the European Union and the Euro: Democracy and Justice’.  I urge readers to take a look at the full report as well as the online debate.  For benefit of EUtopialaw readers, my contribution is reproduced below, with links added.

Miguel, thanks for offering me the chance to chime in on this discussion, even if a bit late relative to the other participants.  There are elements in your report that I like; however, it probably won’t surprise you that I ultimately can’t accept some of your basic premises nor am I convinced that your core proposals are feasible.

I agree that Europe suffers, as you put it (p.5), from a ‘political gap: the scope and level of politics has not followed the scope and level of political problems in Europe’.  This is indisputable.  You call this Europe’s ‘most important democratic deficit’ and it is clearly manifesting itself acutely in the effort to resolve the Eurozone crisis. I’ve argued for slightly different terminology to describe this gap: I call it the ‘democratic disconnect’.  The substitution of ‘disconnect’ for ‘deficit’ is not merely semantic but points to why I’m not ultimately persuaded by your institutional prescriptions. Continue reading

‘Fault, Not Solidarity’ to Save the Eurozone? Apparently It’s ‘Neither’

Prof. Peter Lindseth

 Just a brief update on one of my earlier posts that explored whether the idea of ‘fault, not solidarity’ could serve as a normative argument to support the sort of wealth transfers (‘burden-sharing’) that will no doubt be required in order to resolve the Eurozone crisis.

 One way in which such ‘burden-sharing’ might manifest itself would be in the recapitalisation of banks in peripheral countries like Spain, via the ESM.  The precarious state of bank balance sheets throughout the Eurozone, including Spain, is without doubt one of the ‘legacy problems’ that my ‘Fault, Not Solidarity’ post highlighted, drawing on an idea set out in a report by the INET Council on the Eurozone Crisis.  This is precisely the sort of problem that derives from ‘the original flawed design/perverse incentives of the EMU’ for which all members of the Eurozone should bear some responsibility. Addressing this problem via the ESM was certainly one of the implications, if not explicit agreements, of the Eurozone Summit in June.  Eurozone leaders recognized in the very first sentence of their summit statement that it was ‘imperative to break the vicious circle between banks and sovereigns’.  As Ambrose Evans-Pritchard wrote yesterday in The Telegraph: ‘The document said the ESM must be allowed to “recapitalise banks directly”, clearly referring to Spain’.

 It seems, however, that the finance ministers of Germany, the Netherlands, and Finland apparently don’t see it that way.  As a joint statement of September 25 made clear, in their view ‘the ESM can take direct responsibility of problems that occur’ only after a country has relinquished fiscal control under an ESM bailout and supervision memorandum. Otherwise, ‘legacy assets should be under the responsibility of national authorities’.

 So much for recognizing shared ‘fault’ as a basis for dealing with this key portion of the ‘legacy problem’ that my prior post highlighted.  As Evans-Pritchard concludes, the September 25 joint statement would seem to prevent the ESM ‘from recapitalising Spain’s crippled banks directly under a €100bn (£79bn) loan package agreed with Madrid in June. The burden will fall entirely on the Spanish state’.  And he further elaborates: ‘The extra debt burden is likely to be around €60bn or 6pc of GDP, depending on bank stress tests to be unveiled on Friday. Pessimists fear it could rise to 15pc of GDP once full losses from the property crash are crystallised’.

 I suppose we could call the proposed German-Dutch-Finnish approach to bank recapitalisation as ‘Neither Fault Nor Solidarity’.