Green light for ESM fund comes with strict rules

The court dismissed the idea of the bailout fund as an undemocratic financial black hole, writes DEREK SCALLY

YESTERDAY’S DECISION in Karlsruhe, though a preliminary ruling, has far-reaching consequences beyond Germany’s borders.

Faced with injunctions against the ESM bailout fund, eight red-robed judges had to weigh up two interlinked risks. The first was the financial risk to the euro on markets by issuing an injunction against the ESM now, only to green-light it later. The second was the legal risk to German democracy of allowing through the ESM now, only to decide later it was unconstitutional but unstoppable.

Rather than a fast-track injunction or a slow constitutional ruling, the judges went a third way and delivered (by their standards) a quick ruling – just eight weeks after an oral hearing.

At its core, the judges said it was “highly likely” that the ESM is compatible with the German constitution and thus should not be held up any further, once some additional safeguards are built in.

Before the ESM Bill can be signed into law, the court wants a guarantee of “international law” standard that German liabilities to the ESM fund cannot rise beyond the €190 billion in the treaty, unless Berlin gives its permission.

In Karlsruhe’s view, the existing ESM treaty text is open to various interpretations of liability based on different scenarios.

For instance, if one member does not meet an ESM capital call, other members are obliged to chip in to close the funding gap. But have they contributed additional capital over and beyond their agreed contribution, or have they just brought forward a pay-in of their own capital and moved closer to their agreed liability ceiling?

On another crucial point – the ESM’s confidentiality rules – the court had critical words. It expressed understanding for ESM secrecy rules, to prevent sensitive information passing to third parties. But German MPs are constitutionally entitled to “receive the information they need to develop an informed opinion”. Thus the court ordered that Germany’s ESM governor, the federal finance minister, must be freed from the ESM’s secrecy provisions to answer questions put to him by German parliamentarians.

In both of these reservations, the Karlsruhe court demanded water-tight legal solutions from Berlin and reserved the right to revoke the treaty at a later date if, in hindsight, it decides these concerns had not been adequately met in practice. Before ratification, Berlin has to meet the high legal standard required by Karlsruhe without altering the text of a treaty ratified in all other euro zone states.