One of the factors that has been adding to tensions in the Eurozone has been the concern that the German Constitutional Court would overturn the latest Greek bail-out. It wasn’t expected that the court would do this, but even so, today’s European market relief is understandable now that the court has essentially given those arrangements its approval. What was expected, however, was that the court would insist that the German parliament is kept closely involved in any such future financings. That’s what’s happened. And it may well mean trouble to come. More here:
Note this (from II):
In this context, the Bundestag, as the legislature, is also prohibited from establishing permanent mechanisms under the law of international agreements which result in an assumption of liability for other states’ voluntary decisions, especially if they have consequences whose impact is difficult to calculate. Every larger scale aid measure of the Federation taken in a spirit of solidarity and involving public expenditure at international or European Union level must be specifically approved by the Bundestag.
Note the requirement for “specific” approval. Note too that prohibition against “establishing permanent mechanisms.” What does that mean for the idea that the Eurozone could issue jointly and severally guaranteed eurobonds? Hard to say. And then there’s this from (III):
It cannot be established that the amount of the guarantees given exceeds the limit of budget capacity to such an extent that budget autonomy would virtually be rendered completely ineffective. The legislature’s assessment that the authorisations to give guarantees to the amount of a total of approximately EUR 170 billion are within the capacity of the federal budget does not transgress its margin of appreciation and is therefore constitutionally unobjectionable.
In other words, the fact that the current guarantees are for a defined (albeit very large) amount gives the court some comfort. The obvious question is how the court would feel about a wider, open-ended commitment, such as a future (additionally expanded) bailout facility of a size sufficient to backstop Spain and Italy [EUR 2 trillion?]. Repeating this point, the court continues:
The Euro Stabilisation Mechanism Act lays down not only the objective and the fundamental modalities but also the amount of possible guarantees. The giving of guarantees is only possible during a certain period of time, and it is made contingent on agreeing an economic-policy and finance-policy programme with the Member State affected.
And note this:
However, § 1.4 sentence 1 of [the Euro Stabikisation Mechanism Act] merely obliges the Federal Government to strive to reach an agreement with the Bundestag’s Budget Committee before giving guarantees. This is not sufficient. Instead, guaranteeing parliamentary budget autonomy requires an interpretation of this provision in conformity with the constitution to the effect that the Federal Government is in principle obliged to always obtain prior approval by the Budget Committee before giving guarantees.
As a practical matter, this ruling makes it more likely that Germany will sign off on the Greek bailout. The issue for Merkel has never been whether she could get a majority for this in parliament (large chunks of the opposition are far more euro-federalist than her own coalition) but as to the type of majority she could get. If she needs to rely on opposition votes to get the bailout through (still an open question), what will that do to her government?
What is clear, however, is that the larger facility that the Eurozone will need if Spain or Italy are to be given the support they may need will not be able to be put through in a way that bypasses the German parliament (or parliaments anywhere else in the Eurozone?). Whether there is a majority in support of such a larger facility in each of the 17 Eurozone countries (unanimity will be required) will be, to say the least, an interesting question. That it will take some to put together is not in question, however. It will, and today’s court ruling is a reminder of just that fact. Another long, dragged-out drama is the last thing the markets will need.
Not out of the woods yet, I reckon.