Margarida Vasconcelos: German ratification of the ESM will go ahead, but with conditions

As expected, the German Constitutional Court pronounced yesterday its judgment on the several applications for the issue of temporary injunctions aiming at preventing German ratification of the ESM Treaty and the Fiscal Compact. Unsurprisingly, the Court dismissed the complaints.

Several requests for a temporary injunction were filled with the German Constitutional Court after the ESM and the fiscal pact (Treaty on Stability, Co-ordination and Governance in the Economic and Monetary Union) were approved by the Bundestag and the Bundesrat last June. President Joachim Gauck has delayed signing them into law while the Constitutional Court considered these legal challenges. German ratification of the ESM and the TSCG was therefore put on hold, which has infuriated Angela Merkel. It is important to mention that Germany guarantees almost one third of the ESM and Ms Merkel was the one who called for the fiscal compact. Just Germany alone would provide 27% of the total of capital commitments, so the fund cannot be launched without German ratification.

The complainants, including Peter Gauweiler, professor Karl Albrecht Schachtschneider, professor Markus Kerber, former German Justice Minister Herta Däubler-Gmelin (SPD) on behalf of the ‘More Democracy’ Group, and the Left party (die Linke), were seeking to obtain a temporary injunction against both treaties to stop them entering into force until the court has considered the substance of their complaints and ruled whether they are constitutional. All the complainants argued that both Treaties undermine German sovereignty by transferring too much power to EU institutions. According to the complainants the ratification of the ESM and the TSCG is unconstitutional, as they would deprive the Bundestag of budgetary powers. The plaintiffs believe that ESM puts German taxpayers’ money at risk whilst there is no democratic control, and the TSCG undermines budget sovereignty.

The Court has not ruled yet on the constitutionality of either the ESM or the fiscal pact. But it has decided not to grant temporary injunctions sought by the plaintiffs.
Unsurprisingly, the German Constitutional Court has not rejected the ESM but it has set conditions for its use. President Joachim Gauck will now finalise the ratification of ESM and TSCG by signing the statutes approved by the Bundestag and the Bundesrat while the court considers their constitutionality. If the Court had granted the injunctions, that would have been an indication that the ESM and the fiscal pact are incompatible with Germany's constitution. In fact, the court's Chief Justice Andreas Vosskuhle said "Our examination has shown that the laws with a high probability do not infringe upon the German constitution. That is why we have rejected the injunctions". The court will decide at a later date whether these treaties are compatible with the German constitution, but the final ruling, is very likely to follow yesterday’s decision.

The German Constitutional Court rejected the applications for the issue of injunctions against the ESM and fiscal compact as considered them largely unfounded, but under the condition that the ESM Treaty “may only be ratified if at the same time it is ensured under international law.” According to the Court “The challenged Act of assent to the ESM Treaty essentially takes account of the requirements set out under constitutional law with regard to the safeguarding of the overall budgetary responsibility of the German Bundestag.” Nevertheless, the Court held that provisions of the Treaty establishing the European Stability Mechanism – TESM on the revised increased capital call, the provisions on the inviolability of the documents and on the professional secrecy of the legal representatives of the ESM could be interpreted in a way which “might violate the Bundestag’s overall budgetary responsibility.” Consequently, the Court stressed, “This must be effectively precluded by declarations under international law made upon ratification of the Treaty.

The Court set Germany's maximum contribution to the ESM at €190bn, then it has specified that any Germany's liability arising from the ESM must be limited to its share of the fund's capital and that it is only possible to increase such financial burden by express approval of the German parliament. In fact, the court stressed, “every new payment obligation or commitment to accept liability requires a new mandatory decision by the German Bundestag.” The Court ruled, therefore,  “To meet the constitutional requirement of determining the burdens on the budget in a clear and definitive manner, the Federal Republic of Germany must ensure the required clarification in the ratification procedure, and it must ensure that it is only bound by the Treaty in its entirety if no payment obligations that go beyond the liability ceiling can be established for it without the consent of the Bundestag.

Moreover, the Court said that the parliament must be kept fully informed about the use of ESM funds, despite a confidentiality agreement signed by ESM board members. The Court noted that the provisions of the ESM Treaty concerning the inviolability of the documents of the ESM, and the professional secrecy of all persons working for the ESM “do not explicitly address the information of the national parliaments by the ESM;” and, according to the Court “an interpretation is therefore conceivable which would stand in the way of sufficient parliamentary monitoring of the ESM by the German Bundestag.” Hence, the Court ruled “A ratification of the ESM Treaty is therefore only permissible if the Federal Republic of Germany ensures an interpretation of the Treaty which guarantees that with regard to their decisions,
Bundestag and Bundesrat will receive the comprehensive information which they need to be able to develop an informed opinion.

In fact, the Court ruled, “Germany must clearly express that it cannot be bound by the Treaty establishing the European Stability Mechanism in its entirety if the reservation made by it should prove to be ineffective.” This would entail, therefore, an opt out clause for Germany.

It has already been argued that the ESM Treaty might have to be changed so that the Court’s demands can be fulfilled.

The Court also ruled “The Act of assent to what is known as the Fiscal Compact (TSCG) does not violate the overall budgetary responsibility of the German Bundestag.” In fact, it noted that such treaty “is for the most part identical with the existing requirements of the Basic Law’s “debt brake” (…) and with the budgetary obligations arising from the Treaty on the Functioning of the European Union.” Moreover, the Court held “The Fiscal Compact also does not grant the bodies of the European Union powers which affect the overall budgetary responsibility of the
German Bundestag.”

It is important to recall that the Irish Supreme Court did not find Ireland's proposed ratification of the European Stability Mechanism (ESM) Treaty to be unconstitutional, and declined to injunct the Irish State from ratifying this treaty. However, the Irish Supreme Court has decided to refer to the ECJ for preliminary ruling questions concerning whether the European Council Decision of 25 March 2011 to amend Article 136 TFEU of the EU Treaties relating to the establishment of a permanent Stability Mechanism for the Eurozone is valid and whether Eurozone Member States are entitled to sign and ratify an international agreement such as the ESM Treaty taking into account the EU Treaties provisions, and whether such entitlement depends on the validity and entry into force of the European Council Decision.

According German professor Markus Kerber and Europolis "As long as the European Court of Justice [ECJ] hasn't taken a final decision on the incompatibility of these treaties, neither the Federal Constitutional Court nor the Federal President must take a decision,". Consequently, professor Markus Kerber asked the German Constitutional court to delay its verdict pending a ruling by the ECJ. In fact, they said that the court “has no choice but to refer to the ECJ, in the light of the preliminary judgment awaited from Luxembourg on the Irish case”. However, the German Constitutional Court has never asked the ECJ for an opinion. Hence, unsurprisingly, the Court has refused this new challenged.

In the meantime, aimed at restoring stability in the eurozone, Mario Draghi has recently announced plans for unlimited ECB bond-buying in the secondary market. He stressed that eurozone countries that want the ECB to buy their bonds would be subject to strict conditionality, as they would have to apply to the eurozone's rescue funds, the European Financial Stability Facility (EFSF) or European Stability Mechanism (ESM). Moreover, according to Mr Draghi this bond-buying scheme, the so-called “outright monetary transactions” (OMT), is within the ECB's mandate. The ECB will not buy the bonds itself, but the national central banks according to their capital key with the ECB. Hence, one could say that the German Bundesbank would be in charge of buying the biggest bonds share in case of a eurozone country applies to the OMT. Thus, German as well as taxpayers from other countries would be ultimately liable for this without their parliaments having a say.

It is important to note that Article 123 TFEU provides “Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favor of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.” Moreover,
Article 21 of the Statute of the European System of Central Banks and of the European Central Bank reads, “In accordance with Article 123 of the Treaty on the Functioning of the European Union, overdrafts or any other type of credit facility with the ECB or with the national central banks in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the ECB or national central banks of debt instruments.” The ECB is not allowed to fund government spending but the Treaties have been interpreted as not allowing the ECB to directly buying bonds from states but allowing it to buy bonds on the open market. Under the OMT scheme eurozone countries facing serious debt issues may apply to the ECB to buy their sovereign bonds in the secondary market. Hence, one could say that the ECB by doing this would create a credit facility in favour of those countries, breaching, consequently, the rule of law and spirit of the Maastricht treaty. The president of the Deutsche Bundesbank, Jens Weidmann, voted against such move, as he believes it extends the ECB's role by financing governments and threats its independence.

It is important to mention that Peter Gauweiler immediately filed a complaint before the German Constitutional court against the ECB’s announced plans that it would buy the bonds of eurozone member states in trouble. According to Peter Gauweiler "The ESM -- insofar as it is constitutionally viable at all - should only come into force when the ECB has taken back its self-awarded power as a hyper rescue-shield". He wanted the Court to delay its ruling on the ESM until it has considered the ECB plans. However, the German Constitutional Court has dismissed this complaint and it has not postponed its ruling. However, the Court will review the ECB’s OMT bond-buying programme in the main proceedings.

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