Germany’s constitutional court has at last delivered its Solomonic judgment on Europe’s rescue machinery. Many investors will only have read the headlines and sighed of relief as equity markets did yesterday. But the headline was for the past. Don’t count on more German bailouts (my emphasis).
It chose to avert Götterdämmerung. The nexus of bail-outs already agreed for Greece, Portugal and Ireland are allowable under Germany’s Basic Law – or Grundgesetz – because there is no “automatic” transfer of money beyond the Bundestag’s control. Germany may participate in Europe’s €440bn (£388bn) bail-out fund (EFSF).
To prohibit the existing rescues would have brought down the temple of monetary union within days, and with it Europe’s financial system. The judges did not want a global depression on their conscience.(…)
Yet euphoria is surely misplaced. The court’s president, Andreas Vosskuhle, cautioned Chancellor Angela Merkel and Brussels to watch their step. “This was a very tight decision. But it should not be mistakenly interpreted as a constitutional blank cheque authorising further rescue measures,” he said.(…)
“The Bundestag’s budget responsibilities may not be transferred through open-ended appropriations to other actors. In particular, no financial mechanisms can lead to meaningful fiscal burdens without prior approval,” said the opinion.
“No permanent treaty mechanisms shall be established that leads to liability for the decisions of other states, especially if they entail incalculable consequences,” it said.
The ruling is “a clear rejection of eurobonds“, said Otto Fricke, finance spokesman for the Free Democrats (FDP) in the governing coalition.
Above all, the court ruled that the Bundestag’s fiscal sovereignty is the foundation of German democracy and that Article 38 of the Basic Law prohibits transfer of these prerogatives to “supra-national bodies”.
By stating that there can be no further bail-outs for the eurozone without the prior approval of the Bundestag’s budget committee, the court has thrown a spanner in the works and rendered the EFSF almost unworkable.
It restricts the ability of Chancellor Angela Merkel to strike rescue deals at EU summits, leaving it unclear how she or any future Chancellor could respond to the sort of crisis that blew up in late July of this year when Italian and Spanish bond yields reached danger levels above 6pc. Moreover, Finland, the Netherlands and Slovakia are all eyeing variants of this legislative veto.
Mrs Merkel is already facing a simmering mutiny in the Bundestag. Up to 25 deputies from her coalition – mostly from the FDP and Bavaria’s Social Christians (CSU), but also top Christian Democrats – intend to vote against the revamped EFSF later this month or abstain.
What this reflects is the deeper revolt by German society over escalating rescue costs and the threat to German nationhood. The budget committee is already fractious and is likely to prove tougher with each fresh demand. The question is how will it respond to the disintegration of Greece’s rescue programme or if and when Brussels again pushes for a massive boost in the firepower of the EFSF to cope with Spain and Italy.
The path remains strewn with hurdles. Slovakia said it will not debate the EFSF bill until December, delaying activation until February, leaving a very reluctant ECB to hold the fort by purchasing Club Med bonds. Richard Sulik, the president of the Slovak parliament, has vowed to do everything he can to block the EFSF.
Harvinder Sian from RBS said both Athens and the EU-IMF team are likely to keep Greece’s programme alive for another quarter, with the risk of a “hard default” in December. He said the sorts of “19th Century colonial demands” now being made on Greece have provoked armed revolutions in the past and might tempt Athens to act first, especially since 90pc of Greek debt is subject to Greek contract law.
The contagion risk remains acute. Portugal is “fundamentally uncompetitive” and carries a debt stock (360pc of GDP) too large for plausible deflation. “Spain is only at the start of a multi-year post bubble adjustment, while Italy has proven ungovernable in the gold-standard world of EMU,” said Mr Sian, warning that private investors will not touch the region as long as there is any fear of EMU dissolution.(…)