The city of Karlsuhe will be in the international spotlight on Wednesday, when the nine judges of Germany’s Federal Constitutional Court deliver two crucial verdicts that will play a decisive role in both the country and the Euro Zone’s ability to continue tackle the region’s crisis.
The FCC is set to give a ruling on whether the European Stability Mechanism, the region’s new €500- billion bailout fund breaches the German constitution.
A legal challenge made earlier this year has stood in the way of German President Joachim Gauck signing the necessary legislation, and delayed the implementation of the ESM, which was meant to come into force in July.
The delay has left its predecessor, the European Financial Stability Facility, with resources in the region of €200 billion, as the region’s only source of funds for bailing out beleaguered nations.
The court will also pass judgment on the constitutionality of the fiscal compact that would enforce greater budgetary discipline and deeper integration across the region, and a key element of Chancellor Angela Merkel’s vision of a sustainable region.
Markets have been choppy ahead of the ruling: though they gained some ground after the court confirmed that yet another challenge mounted by Peter Gauweiler, of the Christian Socialist Union of Bavaria party (an ally of Merkel’s CDU) would not result in a further delay to its decision.
Gauweiler sought to mount a challenge following the European Central Bank’s historic decision to launch a programme to buy unlimited sovereign bonds of struggling Euro Zone nations, in a move that attracted much criticism in certain sections of the German political establishment.
While most observers are not expecting an outright rejection by the court of either the ESM or the fiscal compact, many believe that the results are likely to be far from the decisive “yes” that the markets are seeking.
The court’s previous rulings suggest that it “does not like the unlimited liability for German tax payers and too little rights for the German parliament in European decision making,” notes Carsten Brzeski, an economist at ING Bank.
He points to a number of factors in the ESM Treaty that could cause problems – such as requiring member states to raise their contributions to the programme should one member state fail to meet the requirements, as well as the ability of the ESM’s board of governors to raise its maximum lending volume.
‘Yes, but…’
“The tradition of the court suggests it will not simply say ‘no’ in such a hugely important matter but say ‘yes but...’ Rather than give an outright no they will give an interpretation of the law,” predicts Holger Schmieding, chief economist at Berenberg Bank.
This could, he argues, entail interpreting the treaty in such a way that required strict limits on German liability such as saying that the law was compatible so long as the ESM couldn’t get funds beyond what was explicitly agreed by the German parliament.
For the fiscal compact too it could prove a decisive moment, should the court rule that the proposals did indeed require constitutional tweaks (and potentially a referendum). “This would be a devastating blow to Merkel,” argues Schmieding.