Thursday, September 13, 2012

Carrot and stick of the German Constitutional Court

The German Constitutional Court (GCC) yesterday continued its policy of saying "yes, but...". Some people argue that the "yes" was strong and the "but's" were weak; others argue the other way around.

The international media have not given much attention to the fact that yesterday's ruling was a provisional one. The final rule is expected to come in about a month from now. Regarding the above "yes, but...", it can be expected that there will not be changes in the final ruling.

One point whose importance should not be overlooked is that the GCC stipulated that the implementation of the cap on Germany's liability (at maximum 190 BEUR) must be valid under International Law. It will be interesting to watch how the German government deals with this issue. They would be well advised not to deal with it too lightly!

A "light" dealing with this issue would take the form of an attachment to the ESM-Treaty signed by Germany stipulating the cap. Legal experts argue, however, that this would not make it valid under International Law. A "strong" dealing with this issue might have to the the form, in the extreme case, of amending the ESM-Treaty and having it ratified again by all participating countries.

Why is this important?

The GCC could "revenge" itself if it came to the conclusion that it has been "played" by the German government. Such a "revenge" could be based on the following.

In its preliminary ruling, the GCC ruled that "EBC bond buying in secondary markets is not allowed under EU-law". Put differently, the GCC has preliminarily said that what the ECB has decided to do last week is against EU-law. In its final ruling, the GCC could confirm this position (and is likely to do that).

Now, the GCC has no competence to rule within the context of EU-law. However, it does have the competence (private parties do not have that competence) to pass on its ruling on EU-law to the European Court of Justice and then that court would have to rule on the issue.

The GCC's carrot to the German government is that, if the government takes the issue of the cap seriously, they might not do that. Its stick is that they would do that if they felt "played".

Whether or not the European Court of Justice would rule on this issue similarly as the GCC is a matter of guessing. However, it would be best if that guessing would not have to come to a test.


  1. Klaus - thanks, very interesting and in language that someone like me can comprehend.

    What's your reading of the courts ruling with respect to the ESM borrowing from the ECB.

    Am I right in thinking that in order to do that, the ESM would need a banking license.

    Considering your recent post regarding the immunity from prosecution enjoyed by the ESM management etc; and given the recent record of central, commercial and investment banks is that something a wise man should want.

    There are many non-MSM, non-superficial interpretations of the GCC ruling available today, more than enough to make my brain hurt.


    1. While I did make the effort to read through the entire ruling (uff!), I am far from being competent to make a substantiated prediction on the court's final ruling.

      The preliminary ruling is quite clear that the ECB's buying bonds in the secondary market is against EU-law. It is also crystal clear on the issue that the ESM cannot raise funds in whatever form or fashion from the ECB (items 276 & 278). Commentators say that this throws the idea of a banking license for the ESM out the window.

      What I mentioned in my previous post about immunity, etc. is mind-boggling to me. Particularly so since the ECB's Statute does not provide for similar "perks". I can't believe that this has not become a subject of heated discussion. Just imagine the amount of brainpower that has gone into formulating these clauses! They are not accidental. Instead, they were put in there with a specific purpose in mind (if not fear).

      You may have noticed that I try to stay away from issues involving monetary policy. That is too complicated for me. Frankly, I often wonder whether it is not also too complicated for those who are involved in making monetary policy.

      My cup of tea are issues involving the real economy. As regards those issues, I sadly see virtually nothing happening.