‘Dual Legitimation’, Banking Union, and the Demokratieprinzip in Germany: Initial Thoughts after the Recent European Summit

Prof. Peter Lindseth

As several prior posts have noted (see, e.g., here and here), the judgments of the German Federal Constitutional Court (GFCC) in the Eurozone crisis have increasingly turned on the meaning of the Demokratieprinzip under the German Basic Law.  In my reading of the Court’s various decisions (admittedly as an outsider, always subject to correction), the Demokratieprinzip has both a substantive and procedural dimension.  I’d like to explore these dimensions in a bit more detail here, with particular emphasis on the procedural one, as you will see below.  My interest is prompted by some of the decisions made at the most recent European summit, which may lay the groundwork for an eventual banking union in the Eurozone.

The decisions to extend the powers of the ECB (as to banking supervision) as well as those of the future ESM (as to bank recapitalization) arguably raise a number of issues regarding democratic legitimation, and more specifically the procedural dimension of the Demokratieprinzip under German constitutional law, that the GFCC will almost certainly eventually have to address. No less than Mario Draghi has recognized that the proposed extension of the ECB mandate to banking supervision will require augmented democratic oversight. But the issue is: by whom? By national parliaments or the European Parliament (EP)?  The proposed extensions of ECB and ESM authority will likely force the GFCC to define in greater detail the relative roles of the Bundestag and the EP in the ‘dual legitimation’ of European integration.  And in seeking to provide a firmer definition of these roles, the Court will need to reconcile, as it always struggled to do, the functional demands of the Eurozone crisis with the constitutional imperative of preserving the democratic character of the Germany state in a culturally and historically recognizable sense. Even in calmer circumstances, this was not an easy balance to strike. In the current crisis atmosphere, it will be especially difficult.

Before considering the procedural dimension in greater detail below, let’s turn briefly to the substantive dimension of the Court’s Demokratieprinzip.  This dimension has understandably loomed large in recent discussions because it bears directly on some of the major policy options that many view as essential to resolving the crisis.  These include, of course, supranationally enforced fiscal discipline (i.e., the Fiscal Pact), as well as, perhaps more importantly, debt mutualization backed by joint-and-several liability of all Eurozone states (i.e., Eurobonds).  The Court has suggested, albeit in general terms, that some of these policy options may impinge on the budgetary autonomy of the Bundestag to such an extent that they would undermine the democratic character of the Federal Republic and thus violate the Basic Law (see, e.g., the Greek Bailout Judgment of last September, specifically paras.124-25).  For what it’s worth, my outsider’s guess is that Court will likely find the Fiscal Pact constitutionally acceptable, probably on the basis of a ‘pre-commitment theory’ of European integration (discussed previously on this blog here and here; but see also here).  However, as has been widely discussed here and elsewhere, the Court will have much greater difficulties with debt mutualization in whatever form, unless the proposed program is limited in time and scope, perhaps along the lines of the so-called Debt Redemption Fund.  Still, it remains a matter of some guesswork where the current members of the Court will locate the ‘constitutional fault-line’ insofar as the substantive dimension of the Demokratieprinzip is concerned, particularly if the crisis continues to intensify.

There is perhaps a little less guesswork as to the procedural dimension of the Demokratieprinzip, if only because much of the crisis litigation to date has forced the Court to focus on this dimension in much greater detail. The Court’s procedural judgments have had a two-fold focus: first, the form that Bundestag oversight must take when supervising national and supranational actors addressing the crisis (see the EFSF Judgment of this past February); and second, the timing and extent of the information that must be provided to the Bundestag in order to ensure the adequacy of national parliamentary participation in Germany’s crisis response (see the First ESM Judgment handed down last month).

But arguably the most recent European summit, with its tentative steps toward banking union, opened up new areas of litigation with regard to the procedural dimension of the Demokratieprinzip in the Eurozone crisis.  Consider this analysis of the summit decisions from liberal MEP Andrew Duff:

4. The ECB is set to become a very much more powerful institution when it assumes its new functions. The legal base for the banking union reform is Article 127(6) TFEU which allows the Council, acting unanimously on a proposal of the Commission, to confer specific tasks on the ECB relating to the prudential supervision of banks. Parliament and the ECB will be consulted. Other changes to the functions of the ECB, including its market operations, can be made by way of the Statute of the Central Bank through the ordinary legislative procedure (Article 129(3)).

5. The other body which is set to become very powerful is the Board of Governors of the European Stability Mechanism. It already has wide discretion, acting mainly by QMV weighted by shareholding, under the terms of the founding statute to intervene in primary and secondary markets. The decision of the European Council gives the ESM the green light to exercise that discretion. Bailing out banks, shrinking them or closing them down are not mere technical issues but have high political repercussions. The governors of both the ECB and the ESM deserve now to come under close political scrutiny. This raises questions for the European Parliament: whereas the President of the ECB reports frequently to MEPs, there is no provision in the intergovernmental ESM treaty for any kind of parliamentary scrutiny. The incorporation, therefore, of the ESM treaty and the fiscal compact treaty within the EU framework proper as soon as possible – certainly within five years – becomes imperative.

Duff, an MEP, assumes that the proper locus of democratic oversight for these new supranational powers is the EP (as did Mario Draghi apparently in his recent statement, and other commentators have echoed this view).  But the question is: will the GFCC agree?

In the first of my final posts after the conclusion of my fellowship at the American Academy in Berlin, I touched on this very point.  I queried whether the Court would become more sympathetic to claims challenging the nature and extent of the democratic oversight of the ECB (and arguably much of the same logic would apply with equal or even greater force to any claims challenging the oversight of the new ESM).  I wrote then:

Given the realities of the current crisis, which have given vastly greater importance to the ECB’s financial stability role, this area would seem ripe for heightened political (and particularly parliamentary) oversight.  Indeed, one could imagine, based on the GFCC’s decisions on Bundestag involvement in the Greek bailout in September 2011 (here) and the EFSF in February 2012 (here) [and now one should add the first decision on the ESM in June 2012 (here)], that the Court might see this heightened oversight as a constitutional imperative, should the question ever come before the Court.

A decision along these lines, however, would require the Court to revisit its notoriously complacent handling of the independence of the ECB in its Maastricht Decision of 1993 (see paras.95-96).  And given the role of the European Parliament (EP) in this area as well, it would also force the Court to revisit the adequacy of the system of ‘dual legitimation’ in the EU, via both the national parliaments and the EP.  Given the Court’s apparent skepticism of the EP as an instrument of genuine democratic legitimation, at least as evidenced in the Lisbon Decision of 2009 (see paras.274-95)—not to mention the financial stakes for the German taxpayer and German democracy in this crisis—it would hardly be surprising if the Court were to privilege Bundestag over EP supervision in this domain, again should the question ever come before the Court.

The functional demands of the crisis (the need for ‘one stop shopping’, so to speak) arguably point primarily to augmented EP oversight, at least with regard to the ECB.  But the Court has been burned before on different aspects of monetary union, and thus it’s not inconceivable that it could curtail its normally deferential approach and demand heightened national parliamentary scrutiny as the price to be paid for the extension of the ECB’s mandate to bank supervision.  And as to the ESM, it is not at all likely that the Court will share Andrew Duff’s belief that the EP could or should serve as the proper organ of democratic legitimation, at least not now.  This is particularly so because, as Duff himself points out:  ‘Bailing out banks, shrinking them or closing them down are not mere technical issues but have high political repercussions’.

The economist Daniel Gros, director of the Centre for European Policy Studies in Brussels, outlined some of these repercussions in a recent online commentary.  According to Gros, a banking union will require the realization and allocation of ‘large losses’ (especially in Spain), which inevitably ‘means serious distributional conflicts both within and between member countries’.  Given that Germany, as the Eurozone paymaster, will inevitably be front and center in those conflicts, it would not be surprising for the GFCC to conclude that the Demokratieprinzip, in its procedural dimension, requires a significant role for the Bundestag in the oversight of the instrumentalities of any new banking union.

The precise details of this role will turn on the institutional details of the nascent union itself, which at this point are still vague. But what is certain, as Daniel Gros concluded, ‘[t]he road towards banking union is going to be difficult’ for both political and economic reasons.  And because Germany’s participation will be essentially, both politically and economically, one must also always take into account the constitutional obstacles as defined by the GFCC, whether substantive or procedural.  These, too—particularly insofar as the nature and scope of Bundestag involvement is concerned—will undoubtedly make the path toward banking union in the Eurozone even more difficult to negotiate.

2 thoughts on “‘Dual Legitimation’, Banking Union, and the Demokratieprinzip in Germany: Initial Thoughts after the Recent European Summit

  1. Update: Die Zeit has an interesting piece online here (alas, only in German) that is potentially relevant to the constitutionality of the ESM from the perspective of Bundestag participation rights. This piece summarizes the argument of the ESM complainants before the GFCC that Bundestag rights are only secured in national law but, to be fully effective, they need to be secured through international law as well, through a German reservation to the ratification of the ESM itself.

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