Crucial hearings on the eurozone’s bail-out policies at Germany’s top court this week could set in motion events that force Germany’s withdrawal from the euro, a leading judge has warned.
Crucial hearings on the eurozone’s bail-out policies at Germany’s top court this week could set in motion events that force Germany’s withdrawal from the euro, a leading judge has warned.
Udo di Fabio, the constitutional court’s euro expert until last year, said the
explosive case on the legality of the European Monetary Union rescue
machinery could provoke a showdown between Germany and the European Central
Bank (ECB) and ultimately cause the collapse of monetary union.
“In so far as the ECB is acting 'ultra vires’, and these violations are deemed
prolonged and serious, the court must decide whether Germany can remain a
member of monetary union on constitutional grounds,” he wrote in a report
for the German Foundation for Family Businesses.
“His arguments are dynamite,” said Mats Persson from Open Europe, which is
issuing its own legal survey on the case on Monday.
Dr Di Fabio wrote the court’s provisional ruling last year on the European
Stability Mechanism (ESM), the €500bn (£425bn) bail-out fund. His comments
offer a rare window into thinking on the eight-strong panel in Karlsruhe,
loosely split 4:4 on European Union issues.
The court is holding two days of hearings, though it may not issue a ruling
for several weeks. The key bone of contention is the ECB’s back-stop
support for the Spanish and Italian bond markets or Outright Monetary
Transactions (OMT), the “game-changer” plan that stopped the Spanish
debt crisis spiralling out of control last July and vastly reduced the risk
of a euro break-up.
The case stems from legal complaints by 37,000 citizens, including the Left
Party, the More Democracy movement, and a core of eurosceptic professors,
most arguing that the ECB has overstepped its mandate by financing the
deficits of bankrupt states.
Berenberg Bank said the case was now “the most important event risk” looming over the eurozone, with concerns mounting over an “awkward verdict” that may constrain or even block ECB action.
Dr Di Fabio said the court, or Verfassungsgericht, does not have “procedural leverage” to force the ECB to change policy but it can issue a “declaratory” ultimatum. If the ECB carries on with bond purchases regardless, the court can and should then prohibit the Bundesbank from taking part.
The Bundesbank’s Jens Weidmann needs no encouragement, say experts. He submitted a report to the court in December attacking the ECB head Mario Draghi’s pledge on debt as highly risky, a breach of both ECB independence and fundamental principles. The ECB does not have a legal mandate to uphold the “current composition of monetary union”, he wrote.
Dr Di Fabio said it was hard to imagine that an “integration-friendly court” would push the EMU “exit button”, but it can force a halt to bond purchases. This may amount to the same thing, reviving the eurozone crisis instantly.
“It would pull the rug from under the whole project. It is the OMT alone that has calmed markets and saved the periphery,” said Andrew Roberts from Royal Bank of Scotland. Mr Draghi said last week that the OMT was the “most successful monetary policy in recent times”.
The court dates back to the Reichskammergericht of the Holy Roman Empire created in 1490, but it was revived after the Second World War along the lines of the US Supreme Court.
It has emerged as the chief defender of the sovereign nation state in the EU system, asserting the supremacy of the German Grundgesetz over EU law, hence the German term “Verfassungspatriotismus”, or constitution patriotism.
The court backed the Lisbon Treaty but also ruled that Europe’s states are “Masters of the Treaties” and not the other way round, and reminded Europe that national parliaments are the only legitimate form of democracy. It said Germany must “refuse further participation in the EU” if it ever threatens the powers of the elected Bundestag.
It issued another “yes, but” ruling last September. It threw out an injunction intended to freeze the ESM, but it also tied Berlin’s hands by capping Germany’s ESM share at €190bn, and blocked an ESM bank licence. It killed off hope of eurobonds, debt-pooling, or fiscal union by prohibiting the Bundestag from “accepting liability for decisions by other states”.
Crucially, the court said the Bundestag may not lawfully alienate its tax and spending powers to EU bodies, even if it wants to, for this would undermine German democracy.
Chief Justice Andreas Vosskuhle said at the time that Germany had reached the limits of EU integration. Any further steps would require a “new constitution”, and that in turn would require a referendum.
Berenberg Bank said the case was now “the most important event risk” looming over the eurozone, with concerns mounting over an “awkward verdict” that may constrain or even block ECB action.
Dr Di Fabio said the court, or Verfassungsgericht, does not have “procedural leverage” to force the ECB to change policy but it can issue a “declaratory” ultimatum. If the ECB carries on with bond purchases regardless, the court can and should then prohibit the Bundesbank from taking part.
The Bundesbank’s Jens Weidmann needs no encouragement, say experts. He submitted a report to the court in December attacking the ECB head Mario Draghi’s pledge on debt as highly risky, a breach of both ECB independence and fundamental principles. The ECB does not have a legal mandate to uphold the “current composition of monetary union”, he wrote.
Dr Di Fabio said it was hard to imagine that an “integration-friendly court” would push the EMU “exit button”, but it can force a halt to bond purchases. This may amount to the same thing, reviving the eurozone crisis instantly.
“It would pull the rug from under the whole project. It is the OMT alone that has calmed markets and saved the periphery,” said Andrew Roberts from Royal Bank of Scotland. Mr Draghi said last week that the OMT was the “most successful monetary policy in recent times”.
The court dates back to the Reichskammergericht of the Holy Roman Empire created in 1490, but it was revived after the Second World War along the lines of the US Supreme Court.
It has emerged as the chief defender of the sovereign nation state in the EU system, asserting the supremacy of the German Grundgesetz over EU law, hence the German term “Verfassungspatriotismus”, or constitution patriotism.
The court backed the Lisbon Treaty but also ruled that Europe’s states are “Masters of the Treaties” and not the other way round, and reminded Europe that national parliaments are the only legitimate form of democracy. It said Germany must “refuse further participation in the EU” if it ever threatens the powers of the elected Bundestag.
It issued another “yes, but” ruling last September. It threw out an injunction intended to freeze the ESM, but it also tied Berlin’s hands by capping Germany’s ESM share at €190bn, and blocked an ESM bank licence. It killed off hope of eurobonds, debt-pooling, or fiscal union by prohibiting the Bundestag from “accepting liability for decisions by other states”.
Crucially, the court said the Bundestag may not lawfully alienate its tax and spending powers to EU bodies, even if it wants to, for this would undermine German democracy.
Chief Justice Andreas Vosskuhle said at the time that Germany had reached the limits of EU integration. Any further steps would require a “new constitution”, and that in turn would require a referendum.
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