Waiting for September 12

Prof. Peter Lindseth

September 12 is shaping up to potentially be a big day in the recent history of European integration, with national elections in the Netherlands as well as the expected ESM/Fiscal Pact ruling from the German Federal Constitutional Court (GFCC). Adding to the anticipation is the announcement from the European Commission that it plans to submit its proposals for a banking union on the same day, initiating a legislative process that could radically change banking supervision in the EU.

Perhaps with its banking union proposal along with a major speech by President Barroso on the state of the EU, the Commission is hoping to distract from potentially damaging national developments.  A strong performance by Dutch eurosceptic parties, or (more importantly) a decision of the GFCC that the ESM and/or the Fiscal Pact violates the German Basic Law, could combine into something of a perfect storm, sending the Eurozone crisis fully and finally out of control.  That is the fear at least.

As a historian, I’m not generally in the predictions game.  But my gut tells me that the likelihood of the events of September 12 amounting to a decisive change of direction in the Eurozone crisis is unlikely.  No matter what happens, markets will no doubt react with initial volatility (up or down), only to return to a steady state of generalized anxiety thereafter.  My sense—and I certainly could be wrong—is that ‘muddling through’, both financially and politically, will remain the order of the day after September 12.

Consider first the Dutch elections.  My knowledge of Dutch politics is limited, so I’m not able to offer any real insight on the likely outcome. Suffice it to say, however, that a recent report in the Telegraph paints a plausible picture of a country increasingly in the grips of bailout fatigue, with significant portions of the electorate angry about the seeming loss of sovereignty associated with (what is understood as) externally imposed austerity.  But the Telegraph piece also depicts a country acutely aware that its economic well-being depends on the success of the integration project as whole, most importantly the single market if not necessarily the common currency itself.  As one member of the business community asserted, ‘over 80 per cent of Dutch exports go to the EU – and more that half of that to Germany. I am confident Dutch voters won’t want to do anything to jeopardise that’.

The various cross-currents in Dutch politics—functional, political, and normative—map nicely onto the three-dimensional theory of institutional change that I’ve previously discussed on this blog and which also provides the analytical foundation of my book, Power and Legitimacy.  Functional demand (e.g., the need for access markets beyond national borders) may well be pushing governance in a supranational direction, not just in the Netherlands but also throughout Europe.  Timothy Garton Ash, in a typically erudite recent piece in The New York Times, argues precisely along these lines:  ‘[E]ven in the most skeptical countries there is a basic understanding that it is better to belong to a single market of 500 million consumers, rather than depend on a domestic one of 50 million, or fewer than 10 million — the size of half the European Union’s current members’.

And yet—and this is also a crucial point—despite this functional pull toward the single market, prevailing normative/cultural conceptions of legitimacy in the EU still often regard the national level as the appropriate locus of governance, at least in so far as budget, taxation, and borrowing are concerned (precisely the areas most implicated by the Eurozone crisis).  Hence the Dutch concerns about the apparent loss of fiscal sovereignty.

Law and politics are the realms in which differing interests, whether in the Netherlands or elsewhere, must argue over functional/economic needs and normative/cultural conceptions of legitimacy in the effort to reshape European governance.  As I wrote in Power and Legitimacy (p.14): ‘A durable institutional settlement [for the EU] can only emerge … if the processes of change along [the functional, political, and cultural] dimensions are somehow “reconciled” in some roughly stable way—that is, if structural-functional and political demands are satisfied but the outcome is still recognizable from the perspective of persistent, though evolving, cultural conceptions of legitimacy’. Power and Legitimacy was heading to press when the Eurozone crisis intensified in the spring of 2010.  Nevertheless, I was able to slip in a preliminary note that predicted how ‘the euro crisis will again force the EU to reconcile, just as it always had, two key but contradictory features of integration. The first is the cultural persistence of national democratic and constitutional legitimacy in the European system of governance. The second is the functional and political requirements for greater denationalized regulatory power in pursuit of integration’.

Turning to the impending German decision on the ESM and the Fiscal Pact, the GFCC is acutely aware of this need for reconciliation; indeed, much of its case law, stretching all the way back to the Maastricht decision in 1993, can arguably be understood as an effort at reconciliation along these lines (as Chapter Four of Power and Legitimacy describes in some detail). Some observers claim that the Court’s rulings on integration over the last two decades have been ‘all bark and no bite’.  But as Arthur Dyevre has quite persuasively shown, the GFCC’s balancing act in its case law demonstrates how a rational constitutional court ‘need not “bite” in order for its “barking” to be consequential’.  As a leading commentator, one not at all sympathetic to the GFCC, has concluded, the Court’s jurisprudence ‘has left a deep mark on European Union law, and the ideas behind it are very much alive’.

Even if not yet recognized by the CJEU, it is now a de facto principle of EU law that, within the confines of integration’s current legal framework, supranational delegation of regulatory power cannot imperil the continuing existence of constitutional democracy on the national level.  Numerous national high courts have followed the GFCC in enunciating this principle, often subtly, but no less tellingly (again, see Chapter Four of Power and Legitimacy).  But as the German court’s own case law shows, asserting this principle entails a very tough balancing between the functional demands of European integration and the political-cultural commitments to maintaining national forms of constitutional democracy in a historically recognizable, if evolving, sense—no easy balance to strike.

 Even if the Eurozone crisis is making that balance ever more difficult to strike, I still believe the GFCC will likely give the ESM and the Fiscal Pact a pass.  Neither of these instruments entails debt-mutualization of the type most likely to cross what I have previously called the ‘constitutional fault-lines’ for integration in Germany. To use the terminology of an earlier blog post, the Court may well make demands in terms of the procedural dimension of the Demokratieprinzip (Bundestag oversight or other forms of national control).  But it will do everything it can to avoid a finding that the ESM and Fiscal Pact violate the substantive dimension of the Demokratieprinzip—that is, the outer limits on supranational delegation or ultimate restrictions on Bundestag budgetary autonomy—which would then demand a constitutional referendum to allow for further steps in the integration process.

Of the two instruments, the Fiscal Pact strikes me as the least problematic, eminently justifiable under the ‘pre-commitment theory’ of European integration that the Court has long used as the basis of its reconciliation of supranational delegation and national democracy.  The Pact’s delegation of disciplinary powers to supranational bodies, like much supranational delegation in the past, simply ensures that the member states do not defect from their (democratically chosen) fiscal commitments in the treaties.  This, it seems to me, is different only in scope, but not in character, from the power of the Commission or the CJEU vis-à-vis the member states in existing European law.

 The ESM perhaps presents a more complicated issue, because, in its potential financial demands on Germany, it may come closer to impinging on the Bundestag’s future budgetary autonomy in an unconstitutional sense, something that has been the focus of Court’s concern since the Greek Bailout Judgment last September.  The key question, as always, will be the determinate nature of Germany’s financial commitments under the ESM, as well as the nature of the Bundestag’s involvement.  If the Court finds that, either de facto or de jure, the ESM amounts to an indeterminate, open-ended financial commitment for Germany, the Court will have concerns.  But the issue will then become what the Court will see as the appropriate remedy for this defect.  The least likely scenario, as Franz Mayer has pointed out, would be the Court striking down the ESM entirely.  The more likely scenario, consistent with the Court’s approach in the past, would be to impose conditions on Germany’s participation in the ESM that will make the financial commitment more determinate and heighten national democratic control over any potential future increase in that commitment.

I’d like to express one final ‘gut feeling’ about the ESM, which may have a bearing on the Court’s attitude about German financial commitments in the Eurozone crisis more generally.  My sense has long been that, despite the democratically problematic character of the EMU, the Court does not want to be seen as the institution that ‘kills’ the common currency (which could, by the way, revive calls for jurisdiction-stripping legislation that the judges would clearly wish to avoid).  As I wrote in an earlier post, ‘[i]f the Euro dies, it will almost certainly be for economic and political, and not specifically legal and constitutional, reasons’.

In my view, however, it is not just the strong institutional disincentives that will lead the Court to be cautious toward the ESM.  It is also the fact that that the Demokratieprinzip cuts both ways in the Eurozone crisis, not just against Germany’s open-ended financial commitments, but also in favor of quite significant efforts to stabilize the financial and economic situation flowing from the flawed design of the EMU itself.  Like all member states participating in the EMU, Germany bears significant responsibility—indeed, ‘fault’—for the current crisis as a consequence of that flawed design, something to which Germany’s democratically elected representatives significantly contributed.  Indeed, the Court itself played a role, in its approval of the introduction of the euro in 1998 (albeit perhaps on the basis of some misrepresentations from those same representatives).  It would thus be ironic, and indeed not a bit normatively objectionable, to allow Germany walk away from that responsibility on the basis of a one-sided interpretation of the Demokratieprinzip.

Whether this is an argument that has been brought to the attention of the judges in Karlsruhe is unclear.  But my ‘gut feeling’ again is that the judges on the GFCC probably sense the potential contradiction, even if subconsciously, and this should again add to their sense of caution.  If the history of the last two decades is any guide—stretching from the Maastricht to the Lisbon judgments—the Court will continue to struggle to find a reasonable reconciliation between supranational governance and national democracy.  This means that the ESM and the Fiscal Pact will likely survive constitutional muster on September 12, subject to conditions.

3 thoughts on “Waiting for September 12

  1. Update on the Netherlands: The most important news is that in the last week or so, the (relatively) Eurosceptic left-wing Socialist Party has been hemorrhaging votes at the benefit of the more centrist and more Europhile Labour Party. In the polls, the Labour Party has now overtaken the Socialist Party and stands second, with Prime Minister Rutte’s centre-right (ALDE) VVD in first place. This means that the most likely outcome of the coalition negotiations is an unprecedented (in the last few decades at least) four-way coalition of VVD (ALDE), CDA (EPP), D’66 (ALDE) and PvdA (Soc).

    In other news, there’s going to be one more big story on September 12. On that day, the Grand Chamber of the European Court for Human Rights will announce its judgement in Nada v. Switzerland, which might recognise a right for the applicant to travel freely from his residence in Campione d’Italia to the rest of Italy. (He can’t/couldn’t do that now because he is on a terrorist black list and therefore not allowed to enter Switzerland, not even through the air. As a result, he’s been stuck for years in a tiny little Italian exclave, although I vaguely remember that the matter had already been resolved somehow.)

  2. Wolfgang Münchau in the FT (http://www.ft.com/intl/cms/s/0/130ad186-f82c-11e1-bec8-00144feabdc0.html#axzz261K0tSVQ) adds this cautionary note that runs counter to my view (hope?) that the BVerfG will be sensitive to Germany’s democratic responsibility (shared “fault”) for the Eurozone crisis:

    “The German public has bought into the narrative that the crisis was caused by profligate southern European politicians and consumers, who had wasted the first decade of their membership of the eurozone indulging in a debt-financed housing and consumption boom. It is a false morality tale – mostly devoid of economic reasoning. But this has not stopped it from becoming the dominant narrative. Not enough politicians, certainly not enough journalists and commentators, are pushing against this narrative….The same narrative will almost certainly have influenced the German Constitutional Court, which is due to announce its ruling on the ESM on Wednesday….I would caution readers not to take the court’s decision for granted.”

  3. To refine/update my analysis a bit further, it is important to recall that the “constitutional fault-lines” in Germany with regard to the ESM derive not merely from the potentially indeterminate character of Germany’s contribution, but also its potentially “colossal” size (see, e.g., here: https://eutopialaw.com/2012/01/12/understanding-the-german-constitutional-fault-lines-in-the-eurozone-crisis-der-spiegels-interview-with-udo-di-fabio/ and here: https://eutopialaw.com/2012/02/15/greek-sovereignty-and-european-democracy-a-bit-of-a-walk-back-due-to-some-colossal-concerns/). Some of the commentaries have stressed the overall size of Germany’s contribution (approximately 190 billion euros) as a possible basis for finding the ESM in violation of the Basic Law (see, e.g., here: http://www.faz.net/aktuell/politik/staat-und-recht/gastbeitrag-nicht-ohne-uns-11675748.html).

    If the Court goes in this direction, the issue then becomes, as my initial post suggested, the appropriate remedy. Der Spiegel, in an overview today (http://www.spiegel.de/international/germany/german-esm-ruling-issues-at-stake-in-the-euro-rescue-fund-ruling-a-855183.html), outlined in general terms two of the more talked-about possibilities:

    “First, the court … might accommodate the anti-ESM petitioners by ordering that an opt-out clause be built into the treaty. Currently there is no such provision. This would reduce the concerns of some parliamentarians that voting to ratify the treaty would lead to losing control of considerable parts of Germany’s national budget in the long term. And that is no small sum, either, given that Germany’s €190 billion commitment to the ESM represents 60 percent of the country’s forecasted 2012 tax revenues of €306 billion.”

    “Secondly, the justices might define an upper ceiling for Germany’s ESM liabilities. The fact that the ESM is already considered too small in the event that Spain or Italy have to apply for aid speaks for this possibility. This is also because Germany’s share of liability would increase if other countries that are now contributing to the ESM needed to borrow from it and were no longer able to pay in. Additionally, there are also demands to equip the ESM with a banking license for the purpose of purchasing government bonds, which would theoretically create limitless liability for Germany.”

    “The court could counter such concerns by capping Germany’s current guaranteee pledge of €190 billion as the highest amount possible. Of course, this limit wouldn’t convince every ESM opponent, since many consider the euro-zone crisis countries to be bottomless pits and the euro itself to be a badly designed currency.”

    Although the latter point is no doubt true, I still doubt the Court will see the EMU’s flawed design as a basis for overturning the ESM and thus potentially dooming the euro entirely. I return to the “fault” point that I made above as well as here: https://eutopialaw.com/2012/07/30/fault-not-solidarity-a-normative-argument-to-save-the-eurozone/. But as Wolfgang Munchau stressed in his column noted in my last update/comment on this post: “I would caution readers not to take the Court’s decision for granted.”

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