Economist Intelligence Unit
Event
The German constitutional court has rejected a petition aimed at blocking the country’s ratification of the permanent euro zone rescue fund—the European Stability Mechanism (ESM)—and the proposed “fiscal compact”. The provisional ruling clears the way for the ESM to come into effect, subject to safeguards aimed at limiting financial exposure and ensuring parliamentary oversight.
Analysis
The ruling will come as a relief to policymakers in Germany and across the euro zone. Germany is the only euro zone country still to ratify the treaty backing the creation of the €500bn ESM fund, money from which has already been earmarked to support the sovereign bond and financial markets of Spain and Italy over the coming months and years. A decision against the ESM would have thrown the region’s crisis-response strategy into disarray.
The provisional ruling—a final pronouncement will follow later, but it is unlikely to change—by the eight justices of the Karlsruhe court has to all intents and purposes now cleared the path for full ratification of the ESM by the euro zone’s largest creditor country. Germany will be the largest contributor to the ESM fund, accounting for 27% of the total capital. The court did express two reservations, however. It stated that ratification should only go ahead if it was clear that Germany’s current maximum liability of €190bn could only be increased with the express assent of the German representative on the ESM board. Furthermore, it stated that representatives of the lower and upper houses of the German parliament should be kept fully informed of the bail-out fund’s activities (the treaty as it stands implies a degree of secrecy for those responsible for ESM decisions). These two conditions have raised the possibility that changes may have to be made to the ESM treaty, which could result in a further delay in its implementation. But the expectation is that the fund will become operational from early 2013.
The two houses of the German parliament had convincingly approved plans for the ESM and the fiscal compact, which aims to commit countries to stricter budgetary rules, in late June. At the time the chancellor, Angela Merkel, hailed the majorities of more than two-thirds in both houses, which is a requirement of the German constitution, as a clear sign that Germany “stood by the euro”. But against a backdrop of rising public concern in Germany over the scale of taxpayers’ funds potentially at risk from the crisis via the region’s various rescue measures, the move prompted a series of petitions, the largest signed by 37,000 German citizens and backed by the More Democracy movement.
The recent decision by the European Central Bank (ECB) on September 6th, signalling more aggressive intervention in the sovereign bond markets of weaker euro zone countries through its new outright monetary transactions (OMT) programme, added to the sense of disquiet in Germany. This was forcefully expressed by the president of the Bundesbank (the German central bank), Jens Weidmann, who spoke out about moral hazard and the risk that the country could face potentially unlimited exposure to future euro zone losses. However, following weeks of deliberation, the president of the constitutional court, Andreas Vosskuhle, announced on September 12th that it “rejected the injunctions, with the stipulation that a ratification of the ESM treaty is only admissible if [certain conditions] can be guaranteed under international law”.
Impact on the forecast
Our baseline forecast for Germany had assumed court approval of the ESM treaty, with some conditionality attached, so the ruling will not result in any major changes to our outlook. Alongside recent ECB moves, the ruling should buy some time for the region’s politicians, but difficult decisions on further fiscal and financial integration still lie ahead. With public opinion in Germany turning against financial support for weaker euro zone countries and ECB bond-buying, political pressure on Ms Merkel is likely to rise in the run-up to next year’s federal elections in September 2013.
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