The pace of the Eurozone crisis often defies even the most conscientious observers. Mario Draghi’s comments last week that the ECB would do ‘whatever it takes’ within its mandate raised the prospect of ECB intervention in the secondary sovereign-debt market. A follow-up joint declaration from Merkel-Hollande (that ‘they are committed to do everything to protect the eurozone’) was also bold, echoed by a similar declaration from Merkel-Monti. But then there were news reports over the weekend suggesting that ‘everything’ apparently does not include purchases of Spanish debt by the Eurozone’s current bailout fund (the EFSF) or any additional concessions to Greece.
Behind the distractions of day-to-day events, however, certain fundamentals in the crisis persist. With Spain seemingly unraveling, the adequacy of the existing crisis mechanisms remains as questionable as ever. Commentators continue to argue that the functional demands of the crisis will eventually force Germany and other surplus countries to accept something like Eurobonds (debt-mutualization), if not in name then at least in substance. In this regard, the publication last week of a report by group of 17 leading European economists, organized by the Institute for New Economic Thinking (INET), a Soros-backed outfit, has garnered a good deal of media attention, not merely for its dire warnings of impending disaster, but also its effort to outline a comprehensive solution to the crisis.
Entitled ‘Breaking the Deadlock: A Path Out of the Crisis’, the report is well worth the read, certainly by policy makers, but also by lawyers. The report focuses on policy proposals, to be sure. But it also attempts to outline a specifically normative argument, one that might justify burden-sharing among the Eurozone member states, such as short-term debt-mutualization of the type encompassed in the so-called ‘European Debt Redemption Pact’. This is refreshing. Too often economists ignore how institutional change is not merely a consequence of functional demand but also a complex interplay with political-cultural factors. The normative argument outlined in the INET report is helpful because it (at least implicitly) recognizes the importance of that political-cultural dynamic.
Instead of intra-European ‘solidarity’ – an argument to which creditor countries in the Eurozone are increasingly resistant – the INET report looks to mutual, interlocking fault as a basis for burden-sharing, in which no Eurozone state can escape responsibility for the damage that the EMU has caused as a consequence of its design flaws and perverse incentives. The report argues (in para.8) that burden-sharing is not merely ‘necessary’ but also ‘just’:
It is just because the problems that the deficit countries are struggling with were not caused by these countries in isolation, but were the result of a flawed euro zone design that encouraged both reckless borrowing (in the deficit countries) and reckless lending (in the surplus countries). Hence, all countries that signed up to this design, and took part in the lending and borrowing boom, bear responsibility for the crisis.
This argument should be developed further, specifically in legal terms, because it might help the Eurozone survive against the sort of ‘democracy’-based constitutional attack that is likely to be mounted in creditor countries like Germany. To rephrase the argument along those lines: The Eurozone crisis has resulted from the democratic decision of each Eurozone state to establish/join/perpetuate the flawed EMU, and thus each state must bear responsibility for the damage caused as the system has inevitably lurched into crisis. This responsibility may take the form of suffering through austerity and fiscal discipline (say, Ireland or Portugal), or of making the necessary transfers in the immediate term to fix the problem (say, Germany). But the fact that a country (say, Spain) fulfilled the requirements of the original agreement is beside the point; what matters is that all countries share responsibility for the flawed agreement itself and the damage it has caused.
Even if this is not an argument that may convince the readers of Bild or Chancellor Merkel’s Bavarian coalition partners, it may well convince the judges of the German Federal Constitutional Court (GFCC), precisely because it can be recast in terms deeply familiar to the legal mind: fault, causation, responsibility, and proportionality. If Germany does eventually capitulate to the need for burden-sharing at a level commensurate with the crisis (e.g., a redemption pact), the positive opinion of the GFCC will then become crucial, because a constitutional challenge to the program will be inevitable. And to survive constitutional review in Germany or elsewhere, a plausible, democracy-based normative theory will be needed; hence the importance of a modified version of the normative theory based in the INET report.
Despite some of the critiques leveled in the direction of the GFCC, the judges on the Court are almost certainly as aware as anyone of the stakes in the current crisis. They are thus almost certainly as anxious as anyone to find a normative principle adequate to support a workable solution. The problem, to date, has been that no one has articulated an adequate justification for burden-sharing beyond open-ended solidarity and the purported teleology of integration culminating in a federal union. The problem with such arguments is that they quickly run up against the intractable ‘no demos’ problem in European integration, along with the national-democracy protective jurisprudence of several high courts, not just the German (for an overview, see Chapter Four of Power and Legitimacy). The challenge, therefore, is to avoid idealist appeals to intra-European solidarity (no matter how attractive they be in certain quarters) and instead ground the normative principle in the idea of democratic and constitutional responsibility of each participating state.
The fault principle may have some real potential in that regard. It suggests to me at least that it would not be a violation of the Demokratieprinzip to hold the German people accountable for the consequences of the democratic choice they and their elected representatives made in favor of adhering to what has proven to be a deeply flawed EMU, with all its perverse incentives, resulting imbalances, and illusory and contradictory ‘protections’ (e.g., the ‘no bailout’ clause). Moreover, it would be unacceptable, on the basis of protecting democracy on the national level, to walk away from those consequences now (particular given that the Court itself had previously approved adherence to the EMU as constitutional). Burden-sharing thus may be justified both in terms of the Demokratieprinzip as well as Germany’s constitutional‘openness to European law’ (Europarechtsfreundlichkeit).
However, to survive constitutional scrutiny, the burden-sharing must also be strictly proportionate to the inherent risks associated with the initial decision to adhere and the incentives/imbalances/contradictions that the flawed EMU created. The INET report, to its credit, seems cognizant of this limitation. The reforms it contemplates would no doubt ‘take euro zone institutions significantly beyond the status quo (particularly the banking union and the debt restructuring regime)’ (para.14) – and hence significant changes to the existing treaties would be required. Nevertheless:
[I]t is important to note what is not in the proposal: a permanent mechanism for common euro zone debt issuance and a mechanism for countercyclical fiscal transfers. Indeed, there is no common liability in any of our long-term proposals beyond those necessary to establish and backstop the banking union and the ESM, and both are subject to strict safeguards.
Clearly the economist-authors of the INET report are sensitive to the concerns raised by the GFCC in its prior case law on the crisis, particular the prohibition against ‘indeterminate budgetary authorizations’ [unbestimmte haushaltspolitische Ermächtigungen], as the Court put it in the Greek Bailout Decision last September (specifically para.124). But the report’s limitation on open-ended financial commitments also turns on a critical distinction that the authors themselves draw – between steps needed to address the ‘legacy problem’ of damage caused by the original flawed design/perverse incentives of the EMU and those needed to fix the EMU over the long term. As the report argues (para.7):
[T]he critical requirement for tackling the crisis is to separate the solution of the “legacy problem” – stopping the on-going recessions, reducing debt levels, and lowering current account surpluses and deficits within the currency union – from the problem of fixing the structural flaws of the euro zone for the long term. The former requires significant burden sharing. But it does not follow that the latter requires permanent transfers or jointly and severally issued debt.
The burden-sharing to address the ‘legacy problem’, although quite substantial, is presumably calculable and hence adequately determinate; a commitment to open-ended transfers in the future, by contrast, is not. The latter, as I have tried to point out previously on this blog, almost certainly falls on the wrong side of the constitutional ‘fault-line’ defined by the GFCC. But that does not mean that all members of the Eurozone cannot share the burden for the ‘legacy problem’ – either in the form of fiscal discipline/austerity or defined (if substantial) fiscal transfers – because all are, in a very real sense, legally at ‘fault’ by virtue of their participation in the flawed EMU itself and the perverse incentives/imbalances/contradictions it has enabled.
But the same degree of burden-sharing, at least in a financial sense, does not necessarily apply to ‘fixing the structural flaws of the euro zone for the long term’, at least to the extent that such fixes would entail open-ended liabilities and thus unconstitutionally impinge on the ongoing viability of democracy on the national level. In this regard, the majority of the authors of the report quite rightly reject ‘a move toward a federal political union as a necessary development of the euro area’ (para.13). As the report elaborates (para.6): ‘Except in the context of a European super-state in which financing and control of spending are tightly linked, a majority of the population in the surplus countries believes that a permanent “transfer union” is too high a price to pay for the preservation of the single currency, even if the alternative is a catastrophic crisis’.
The report could have strengthened this argument, however, by acknowledging that the problem identified here is not just political but also constitutional. As the GFCC put it in the Greek Bailout Decision (para.125), the Bundestag ‘is not permitted, even by statute, to subject itself to any mechanism of financial effect, which—whether on the basis of its overall conception or an overall assessment of its individual measures—could lead to unclear burdens of budgetary significance, be they expenditures or revenue losses, without prior constitutive consent’. A one-time, open-ended decision by the Bundestag would not satisfy this requirement; each budgetary burden would need to be individually voted. In short, from the GFCC’s perspective, a ‘transfer union’ – or, in more benign terms, a ‘federal union’ – would entail unacceptable costs to constitutional democracy on the national level.
There may well be aspects of the report’s proposals that are in tension with elements of the Court’s prior case (for example, the call, in para.13, for democratic supervision of any new mechanisms of mutual fiscal discipline by way the European Parliament). As I’ve argued on this blog, this raises the question of the ‘dual legitimation’ of European governance that the German Court will inevitably need to clarify. But this problem lies more in the procedural dimension of the Demokratieprinzip, which is more lenient than the substantive dimension. The latter defines absolute limits to supranational delegation whereas the former defines the nature and scope of democratic supervision within the confines of supranational delegation that is otherwise acceptable. One of the great virtues of the fault principle articulated in the INET report may be that it avoids the strictures of the substantive dimension of the Demokratieprinzip and thus shifts the question to the relative balance of Bundestag and EP oversight of delegated supranational authority, a much more manageable terrain.
Again, the authors of the INET report could have greatly strengthened their argument if they confronted some of these constitutional questions directly. If INET stands for ‘new economic thinking’, then perhaps any follow up to the report should try, in a genuinely novel way, to develop the normative/constitutional dimension of these proposed policy solutions in more explicit terms. Certainly the present report may contain the kernel of a potentially winning normative argument, or at least one that the judges in Karlsruhe will not find so easy to dismiss out of hand. But to prevail, the fault principle must be further developed, and for that the INET should look not merely to economists for solutions, but also constitutional lawyers.