The German Constitutional Court will not stop the euro bailout

Dr Gunnar Beck

On 10th July, the German Constitutional Court started hearings with a view to deciding the lawfulness of the European Stability Mechanism (Treaty) and the fiscal compact under the German Constitution. Its substantive judgment on whether the treaty package for the euroyone is indeed unconstitutional is not expected until the autumn.

Constitutional complaints against further EU integration have almost become a routine: Whenever there is a new EU treaty, it will be challenged in the German Constitutional Court. In fact, the Court has been ruling on the compatibility of EU law with Germany’s Basic Law – the official name of Germany’s constitution – since the early 1970s. For the next three decades the Court explored this question from the perspective of the fundamental rights guarantees under the constitution and whether the EU treaty order gave adequate protection to those guarantees. In a series of judgments starting with the socalled Solange decisions its judgements on the Maastricht and Lisbon Treaties the Court repeatedly affirmed the supremacy of Germany’s constitutional rights over EU law, at least within Germany.  At the same time it did not consider that any of the EU measure complained of in any of the cases before it, involved a breach of fundamental constitutional rights.

In its influential Maastricht judgment of the 1990s the Court affirmed the supremacy of fundamental rights guarantees over Union law and introduced the concepts of democratic accountability, the need for parliamentary control, and limited conferral as key factors defining the limits of any transfer of further powers to the European Union. Additional national law-making and political powers, the Court ruled, may be handed to Brussels only if properly approved   by the Bundestag (the German Parliament), if they respect fundamental rights in the German Constitution and if the limits of those powers are clearly defined. In its Lisbon Judgment of 30 June 2009 the Court for the first time went on to set substantive limits to further EU integration. The Court stated that for as long as there is no one common recognisable European demos or people, and a viable shared political culture throughout the EU, the institutions of the EU including the Court of Justice must respect the national identity of the Member States together with a minimum core of sovereignty which must remain vested in national political institutions.

The Constitutional Court identified five policy areas where a further transfer of national power would seriously erode state sovereignty:

1)      the nation state’s monopoly on the use of military and police force

2)      criminal law,

3)      fundamental fiscal decisions involving taxation and expenditure,

4)      social policy including the family,

5)    Important decisions on cultural decisions such as th eschool and education  sustem, and the provisions governing the media, art and cultural life and dealing with religious communities.

Unless the democratically accountable and legitimated national political institutions retain  effective political  control over those core area of self-government, the Court held, they will lose the autonomy for effective action. The cornerstone of those core areas, which is fundamental to national sovereignty, is parliamentary budgetary autonomy. Nation states became self-governing, albeit representative, democracies when budgetary control passed from monarchical control to elected representative institutions; they will lose their sovereignty and cease to be self-government when their parliamentary institutions lose budgetary autonomy.

It is fundamental to the principle of democracy that the German Bundestag, the Court states at para 256 of its judgment, must decide, and be democratically accountable for, the overall burden of taxation placed on citizens. EU Membership must not therefore place such financial obligations on Member States so as to deprive the national parliaments of the ability to adopt and control its implementation and hence the budgetary autonomy for the effective political regulation of the economic, cultural and social framework of the ‘living conditions’ of the individual nations that make up the European Union. The Court did not, however, spell out either the specific formal mechanisms necessary for parliamentary control nor the precise level of commitment at which control is effectively lost.. The Lisbon judgment was a warning shot issued against overly integrationist politicians, but like supreme courts everywhere the Court carefully avoided fettering its own discretion.

Vagueness commonly results in litigation. And so the overlap of the Lisbon Judgment with the beginnings of the euro crisis nurtured hopes that the Court might use the principles of democracy and parliamentary budgetary autonomy as the basis for striking down the various euro rescue deals. These hopes have proved unfounded. In the first of three important euro rescue judgments, handed down on 7 September 2011, the Court rejected several complaints that the first euro rescue fund, the European Financial Stability Facility (ESFS), and related measures which authorised the bail-outs for Greece, Ireland and Portugal, did not entail a sufficiently large financial commitment to threaten the budgetary autonomy of the Bundestag. The Court so held despite the fact that the EFSF and related measures involved potential liabilities for Germany of around 170bn euros, which have since risen to over 211bn euros and will rise further if some of the other guarantors of the fund become insolvent or if the fund raises further funds by issuing bonds for which solvent euro zone countries would ultimately be liable. Both propositions are all too realistic, and the EFSF has in fact become substantially hedged since the Court’s judgment.

In support of its conclusion the Court emphasised that the Bundestag enjoyed a considerable margin of appreciation when assessing the budgetary sustainability of the financial commitments entered into and the risks of default they may entail. The Court did, however, clarify that before it could give any further guarantees the Government had to obtain the approval of the 41-member Bundestag’s budget committee. As with most national parliaments, the Bundestag’s Budget Committee is composed of backbench MPs and the government of the day is normally guaranteed a majority which broadly reflects the distribution of power within the parliament as a whole. The Budget Committee is therefore no more likely to exercise effective accountability or political power over the government than the Bundestag, or any more likely to vote against its government than any parliament anywhere in the Western world. No doubt the Court had good reason to conclude that the German parliament’s budgetary sovereignty was adequately safeguarded by politicians in the very front row of the second raters, and that potential liabilities of somewhere around 170bn to 211bn euro did not seriously affect the Federal budget with its annual value of circa 350bn euros.

The Court handed down another judgment on the EFSF in February 2011.    In essence, the Court found that, to satisfy the general demands of representative democracy on questions relating to the national budget (most importantly revenues, spending, borrowing, and loan guarantees), the Bundestag as a whole must, as a general rule, approve Germany’s participation in the EFSF, and that it was unconstitutional routinely to delegate all decisions to be taken in connection with the EFSF to a small nine-member subcommittee of the budgetary committee, as the German government proposed to. However, in circumstances where EFSF activities require expedited and confidential review by the national parliament (e.g., with regard to purchases of government bonds on the secondary market), delegation to ‘the smallest number of people’ could be constitutional. Subject to minor modifications the Court confirmed that the establishment of a small subsidiary body to exercise duties of the  Bundestag as a whole is covered by Parliament’s constitutional right to organise its own affairs, and that the Bundestag has a broad scope of discretion in this respect. In these circumstances Parliament’s right to determine the federal revenue and expenditure may in certain circumstances be adequately protected if decisions that may, in toto, involve financial commitment exceeding the annual value of the German federal budget and taken by laymen poorly unequipped to evaluate the credit risk involved, are taken by a small sub-committee sworn to secrecy.

And finally, in its judgment of 19 June 2012, the Court affirmed the general duty on the German government to keep the Bundestag informed at an early stage of any euro rescue-related negotiation results and measures that required neither urgency nor confidentiality. The government, the Court found, acted unconstitutionally when it did not release final drafts of the ESM Treaty and other related draft treaties for up to several months. Failure to respect the Bundestag’s constitutional right in this respect, however, could not invalidate German approval of the ESM Treaty itself.

A clear pattern emerges from the German Constitutional Court’s dozen or so cases in which it has considered the evolving relationship between EU law and the German Basic Law over a period of 40 years: The Court self-confidently asserts its role as final arbiter in conflicts between EU law and the German constitution, no less than the position of the German Bundestag as the ultimate source of democratic legitimacy for any transfer of power and far-reaching exercise of power by the EU. Moreover, the Court has stated that the EU must respect a core of national powers central to which is the budgetary autonomy of national parliaments. Parliaments must be able to determine the fundamental decisions governing levels of taxation and expenditure.  The euro crisis now threatens precisely the budgetary autonomy the Court has so confidently asserted as a matter of principle. So far the Court has decided that the Bundestag’s budgetary autonomy was not threatened by its approval of financial commitment that could exceed the annual value of the federal budget itself. It also held that within that overall framework which had to be approved by the plenary as a whole specific decisions involving dozens, perhaps hundred of billions of euros, could be taken on behalf of the parliament as a whole by a nine-member backbench committee. The Court’s theoretical self-assertion has gone in hand with hand with judicial deference in practice.

The Court is now asked to rule on the compatibility of the permanent euro rescue fund, the European Stability Mechanism, with the German Constitution. According the Professor Sinn, Germany’s overall exposure as a result of the ratification of the ESM will rise well beyond its current level of 704bn euros. If the ESM issues further bonds that exposure will rise further, as it would if any or several of the weaker euro zone members default, leave or become insolvent as some effectively are. The current exposure amounts to roughly twice the size of Germany’s federal budget. It could quickly rise to three or even four times that amount. The ESM Treaty was broken even before it could be ratified, when the euro zone members agreed to use its funds for the direct rescue of distressed banks in Spain and Italy in direct breach of Article 3 of the Treaty.

That would give the Court a further powerful argument for declaring the ESM Treaty unconstitutional if indeed such an argument were still needed in relation to a measure that would entail adding to potential liabilities several times the size of the federal budget. However, the key issue in determining which way the judicial axe will fall when the Court will finally rule on the constitutionality of the ESM Treaty is not whether there are valid legal arguments for declaring the treaty unconstitutional – there evidently are – but whether the Court will be prepared to tread onto political territory where constitutional courts rather do not venture – the realm of foreign policy and budgetary policies which are the traditional preserve of the executive – and by judicial Diktat reverse five decades of almost unquestioning commitment to further European integration by the German government. It would strike down the ESM only with the tacit approval of the German government – acquiescence and abetment by a government that has staked its political credibility on the euro rescue and which would suffer crucial loss of legitimacy if found to have acted unconstitutionally in signing away Germany’s birthright as a result of a late night at Brussels. And the Court would be stigmatised as the body of unelected judges which killed off the euro. The result would be an crisis of legitimacy, and temporary economic uncertainty. It is possible, even likely, that a failed, or even a very expensive euro rescue will ultimately entail more serious and deleterious economic and political consequences for Germany than a judicially induced, sagacious euro exit ‘just in time’. Unfortunately, hypothetical scenarious have little justificatory force. That is why the German constitutional court, arguably the most learned, intellectually aware and sagacious body of judges anywhere with the possible exception of the European Court of Justice, is unlikely to show the courage no governing politician has shown yet: to stare right in the mirror onto the Medusa of the bad, brute facts.

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