Hoover Daily Report

Europe's Bailout Fund Goes to Court

via Wall Street Journal Europe
Friday, July 6, 2012

A major roadblock may lie ahead for Europe's rescue plans, and this one isn't coming out of a country that anyone can ignore. Germany's Constitutional Court begins hearings next week on the European Stability Mechanism and the fiscal pact, which the German Parliament voted last month to approve. At the very least, the court sessions will delay establishment of the ESM, the euro zone's permanent bailout fund, which had been scheduled to go into effect on July 1. And if the German Court finds the bailout fund altogether unconstitutional, its blueprint might need to be revised or even scrapped entirely.

This political and legal crisis has been a long time coming. Throughout the process of European unification, the German Court has consistently ruled to protect Germany's sovereignty. Short of a profound reshaping of political institutions, the Court has signaled that democratic legitimacy rests with the elected governments of nation-states—not with the EU bureaucracy.

As recently as mid-June, the Court sharply reminded Chancellor Angela Merkel's administration that it is obligated to involve the Bundestag in substantial and timely ways in any plans that touch on Germany's status in Europe. The message was that legislative participation has to be more than just an afterthought for perfunctory acclamation of government decisions.

Yet the Bundestag's June 29 vote to adopt the ESM—which took place in the immediate aftermath of another Brussels summit—had all the hallmarks of just such a decision. In an extraordinary constitutional moment, German President Joachim Gauck has agreed to refrain from signing the legislation until the Court has ruled on it. Any next steps now depend on the outcome of constitutional deliberations.

The ESM's German opponents have diverse political goals. Conservatives, including members of Mrs. Merkel's own coalition, harbor euroskeptic hesitations, and the current crisis only reinforces their nostalgia for the deutsche mark. The left, meanwhile, fears an institutionalization of Continent-wide austerity policies and objects to using public funds to save private banks. Right and left overlap with objections that this new step in expanded European government threatens to undermine parliamentary rule altogether.

Herta Däubler-Gmelin, the former German justice minister, has co-signed a substantial appeal to the court that has gained wide public circulation. It argues that adoption of the ESM and the fiscal pact would unconstitutionally surrender Bundestag budgetary authority to an external body. Germany would thereby be subject to fiscal constraints and—more worrisomely—could be saddled with enormous financial obligations to make up for the inevitable future shortfalls of other euro-zone members.

Once signing on to the ESM and fiscal pact, Germany would not be allowed to refuse to make such payments, nor could it ever exit the treaty, except in the unlikely case of a unanimous vote of all members. Why would they let the cash cow leave? The treaty also stipulates that all deliberations of the ESM's Board of Governors enjoy secrecy, which would preclude any substantial oversight from the Bundestag or any other legislative body.

The German Court has a track record of deferring to the federal government's choices in Europe politics. In this case, however, the irrevocable nature of ESM membership and the scope of the potential financial obligation may elicit a bolder response. The court could well decide that an incursion on national sovereignty of this magnitude would require a plebiscite, as is in fact required by the German Basic Law. Even Finance Minister Wolfgang Schäuble, an advocate of "more Europe," has indicated that a popular vote is an increasingly probable outcome.

The result could be a dramatic moment for Europe. The German voter is unlikely to opt to give up sovereignty to the ESM or to believe that destroying northern European prosperity is the right way to solve Southern Europe's debt problems.

Mr. Berman is a senior fellow at the Hoover Institution and a professor of German Studies at Stanford University.