Green light for ESM fund comes with strict rules
Beyond the immediate concern, stabilising the euro, the ESM ruling has wider consequences in the euro zone debate. The court dismissed concerns that the ESM could assist the ECB in backdoor state financing, saying its reading of the ESM treaty was that the fund is subject to existing EU law, which doesn’t allow the practice.
In addition, Karlsruhe said it understood the ESM treaty to preclude the fund from becoming a “counter-party of the euro system”, in other words being awarded a banking licence. This is based on a legal opinion from the ECB, but takes on a different character in a ruling by Germany’s highest court. Neither, it said, would the ESM be allowed to deposit sovereign bonds it held with the ECB as security for loans.
Interestingly, the court said it was reserving its opinion on a last-minute challenge to the constitutionality of ECB bond-buying until its final ruling (expected early next year). This new departure for the ECB may ease pressure on the ESM but is highly unpopular in Germany. It will be interesting to see whether Karlsruhe, in its final ruling, shares the widespread German concerns that ECB bond-buying is, effectively, state financing.
It remains to be seen, too, how financial markets will react to the ruling. Markets have welcomed the idea of a permanent bailout fund, but already worry that even a €500 billion lending facility may not be enough to support Spain and Italy.
Ahead of next year’s German general election, further Bundestag approval for further bailout funds is considered unlikely. Once markets have digested the verdict, they may not take kindly to its underlining of the limits of participation in a fund by its largest member before it even comes into effect.
Despite the conditions, Karlsruhe has dismissed claims of Germany’s vocal ESM critics that the ESM is an undemocratic, financial black hole.
The court insisted the fund does not constitute an infringement of parliamentary budgetary sovereignty. Even if it exists in perpetuity, the judges said, ESM activities are limited by its capital. Once Germany’s €190 billion contribution is exhausted, the judges said, the ESM has no further claim on Germany. “Each new payment obligation or commitment to accept liability requires a new mandatory decision by the German Bundestag”.
Germany’s constitutional guardians have given a green-light to a permanent euro zone bailout fund, making final demands to copper-fasten German citizens’ constitutional rights. Is it too late for their judicial peers around Europe to follow suit?