As I predicted in the Wall Street Journal in July and discussed earlier in the week in the Asia Times, the German Constitutional Court last week deferred to the German government and approved the ESM Treaty subject to minor qualifications. Since the judgment the markets and politicians throughout the eurozone have been in jubilant mood. Even the German ambassador in London lost his guard when, in an interview with the Guardian newspaper, boasted that there was no other country in the world where ‘all but one political party’ would consistently vote to pay out ‘billions and billions’ on euro rescue packages which are ‘not very popular’, and, he should have added, would cost the German taxpayer hundreds of billions even in the unlikely event that they ‘succeed’. Germany’s europhile political establishment have not only ‘have quit reason’, they may have rejoiced too early.
In a speech marking a Bundesbank colloquium on ‘paper money, state financing and inflation’ as part Frankfurt’s week of celebration commemorating Goethe’s death in 1832, Bundesbank president Weidmann renewed his attack on the ECB’s unlimited bond buying programme. In a carefully worded allusion to the former Goldman Sachs executive and now ECB chief Mario Draghi, Weidmann reminded his audience of Mephistopheles’ eager administrations to the bankrupt Holy Roman Emperor in Goethe’s Faust part II: ‘What thou asketh, my Lord, I shall procure, and procure I shall much more thou asketh.’ Weidmann is no foolhardy academic: He gave his address shortly it was revealed that capital from Spain and other eurozone countries had reached unprecedented levels. And he can take comfort not just from Goethe, but from some as yet unnoted passages from the Constitutional Court’s judgment.
With its ESM judgment the Court abandoned its long-established position that there were certain core areas of national sovereignty which required that the Bundestag – the German Parliament – retained its budgetary autonomy. Now nothing seems non-negotiable. While the Court ruled that Germany’s liability under the ESM was initially limited to 190bn euros, it also declared that unlimited liability was not (!) incompatible with Germany’s budgetary autonomy provided the Bundestag itself authorises every move in that direction. Germany’s annual federal budget in 2011 amounted to 306bn euro. Germany’s overall exposure in the euro crisis including the ESM is approaching, and could soon exceed, one trillion euros, i.e. three times that amount. None of that, the Court said, would seriously diminish Germany’s financial room for manoeuvre.
All that now stands between Germany and debt mutualisation are her 620 MPs. Few think that all but a few dozen parliamentarians would put economic sense of national interest above party or personal ambition. In Germany only half of all MPs have a constituency. The other half enter the Bundestag through their party’s list system. If an MP votes against the government, the prospect of a comfortable party list place quickly disappears. And for those who seek advancement and ministerial position, these are in the gift of the party leadership, which will offer preferment only in return for loyalty and obedience. Little wonder then, that for the last three decades there has been no noteworthy parliamentary rebellion against a German government.
The Court’s decision regarding the ESM, though perhaps not the poverty of its central line of reasoning, was widely expected. Of ultimately greater importance, however, might be a little noticed passage buried deep within the technical part of the judgment at para 278. Peter Gauweiler, one of the few independently minded German MPs who is sceptical of Germany’s European mission, had asked the Court to review the ECB’s bond buying plans. Gauweiler hit upon a sensitive nerve. At para 278, the Court observed that borrowing by the ESM from the European Central Bank, alone or in connection with the depositing of government bonds, would be incompatible with the prohibition of monetary financing in Article 123 TFEU (Treaty on the Functioning of the EU). The Court also declared that the prohibition applied equally to the direct acquisition of government bonds by the ECB and ECB bond purchases on the secondary market or via intermediaries whenever such purchases were aimed at financing governments independently of the capital markets. Although the remarks are not part of the decision itself, the Court appears to be saying nothing less than that ECB President Draghi(avelli)’s bond buying programme is unlawful, both under EU law and the German Constitution. There is no question that the Constitutional Court has jurisdiction to prohibit the ECB’s bond-buying - it has always maintained that it could, where need be, review EU laws and acts for compliance with Germany’s Basic Law. ECB critics, however, would be ill advised to place too much hope in the Constitutional Court. The ECB will continue buying bonds until told not to by the European Court of Justice or Chancellor Merkel. All the German Court could do is to instruct the German government not to underwrite the ECB’s balance sheet in the event that its capital is wiped out due to junk bond purchases, or forbid the Bundesbank to buy bonds for the ECB. Neither will happen. The Court has a history of asserting the German Constitution in principle, but submitting to the German government and EU in practice. And on further EU integration it has often barked, but never bitten. It will refuse to bite again if it were asked expressly to rule against the ECB for two reasons: the ECB will create a fait accompli, and the Court is not independent in that its members all emerge from a political process . It is a little known fact that all constitutional judges are appointed on the recommendation of the mainstream political parties which remain integrationist despite popular majority opposition to further bail-outs. The leading German business daily Handelsblatt further notes that Court President Voßkuhle is on record as calling for the restriction of constitutional complaints by individual applicants. It also reports that he retains his chair at Freiburg University and a member of the governing body of the university’s foundation governing council – together with finance minister Schäuble and EU Commission President Barroso with whom he has shared a close working relationship. And the British Guardian has revealed that there ‘have been strong suggestions of at least one high-level meeting between the government and the court’ including ‘speculation that the two bodies might have worked closely on a face-saving solution.’ The author himself can corroborate these reports which reached him from various independent well-informed sources which all suggested that the judgment has been ‘agreed’ before 22 August when most of the judges departed for a well-deserved holiday from the arduous work of rewriting the constitution to fit the requirements of the euro crisis; as the Süddeutsche Zeitung revealed on 7 September, even the contents of judgment was known in Berlin and amongst foreign political leaders and investment bankers well in advance. The author himself had heard from US investment bankers and EU officials as early as February 2012 that a former top UK politician had advised them that ‘his contacts in Germany had assured him that the German government would do whatever it takes to save the euro and whether the German public want it or not.’ Constitutional law in Germany, sadly, seems to be the justification of government policy by normative means.
The Court, neither the reality-conscious academic nor the thoughtful practitioner will be inclined to doubt, will not rule against the ECB unless the German government wants it to. However, its passing critical comment on the ECB’s plans has not gone unnoticed within the CSU of Merkel’s ruling coalition and further strengthens the position of Bundesbank President Weidman. Continued opposition by Weidmann may eventually force Merkel to choose between Draghi and Weidmann. The lack of politically acceptable alternatives together with the short-term attraction of recourse to the printing press in a low-growth environment would suggest that Merkel might now be ‘wedded’ to Draghi just as the Emperor and Faust sold themselves to Mephisto for money and love – the eternal promises, in reverse, of fleeting pleasure and happiness in abstracto, which are too often pregnant with disaster.
Weidmann is quickly becoming the most popular protagonist in the euro crisis in Germany. And if Weidmann cannot be silenced by his Empress nor inveigled into complicity by or Draghiavelli, then even the long pliable German public may finally awaken from its long dogmatic euro-slumber.