Tuesday, September 11, 2012

Comments on the ESM-Treaty from a non-lawyer

Well, tomorrow is the day! At 10 a.m. tomorrow, the German Constitutional Court will present its opinion on the ESM-Treaty. My prediction? It will say: "Yes, but..."

In last Sunday's talk-show on ARD, the former ECB/Bundesbank executive Otmar Issing was asked whether he understood the ESM-Treaty. His answer: "No, but I hope the Constitutional Court will clarify what it means".

This prompted me to finally read the 60+ pages from start to finish.

I was reminded of my bank training program 40 years ago. In one class, we studied legal documentation such as promissory notes. Each promissory note began with the phrase: "For value received, the undersigned promises to pay...". I asked the question: "Why does it say 'for value received'"?

I was educated that if it didn't stipulate "for value received", the debtor could later refuse payment, arguing that he had never received any value in exchange for signing the promissory note.

From that, I learned that it was not only important to understand what the text of a treaty said but, equally important, why such text was put into the treaty in the first place. Typically, it is put in there to prevent certain things from happening or to make sure that certain things can be done without explicitly stating so.

With that in mind, let me list a few quotes from the ESM-Treaty where the political leadership should have, but did not, explain to the people why they were put into the treaty, what they are supposed to prevent and which things can be done without being explicitly stated. It would be helpful if the Constitutional Court's "but" would shed some light on this.

Here are the quotes:

"The ESM, its property, funding and assets, wherever located and by whomsoever held, shall enjoy immunity from every form of judicial process except to the extent that the ESM expressly waives its immunity for the purpose of any proceedings or by the terms of any contract, including the documentation of the funding instruments".

"The property, funding and assets of the ESM shall, wherever located and by whomsoever held, be immune from search, requisition, confiscation, expropriation or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action".

"The archives of the ESM and all documents belonging to the ESM or held by it, shall be inviolable".

"In the interest of the ESM, the Chairperson of the Board of Governors, Governors, alternate Governors, Directors, alternate Directors, as well as the Managing Director and other staff members shall be immune from legal proceedings with respect to acts performed by them in their official capacity and shall enjoy inviolability in respect of their official papers and documents".

Without any additional explanation, these clauses literally beg the questions of why they were put into the treaty, what they are supposed to prevent and which things can be done without being explicitly stated.

I have looked up the Statute of the ECB. There is no such language in that Statute (interestingly, there is a lot more language about the responsibilities of ECB-officials than there is in the ESM-Treaty about ESM-officials). Why would ESM-officials have been put in a senior position relative to ECB-officials?

Does anyone really believe that this language made it into the ESM-Treaty because it is standard language? Of course, not! It made it into the treaty because there were serious concerns that, if they were not there, substantial trouble could be caused later. What are they supposed to prevent? Very easy! They are, among others, intended to prevent personal responsibility of the executives involved. Does that encourage those executives to do things which are not explicitly stated in the treaty as being permitted? Of course, it does!

I am not suggesting that such wording is absolutely impermissible. I do suggest, however, that political leadership has immensely fallen short of its responsibility to explain the ESM-Treaty in more detail to the people.

Addendum per 12.09.2012
At least the German Constitutional Court stipulated that no relevant ESM-information can be withheld from the German Parliament. 


  1. Herr Kastner

    I have long questioned this treaty, and especially in the light of the quotes you have made.

    "I do suggest, however, that political leadership has immensely fallen short of its responsibility to explain the ESM-Treaty in more detail to the people."

    Not only that but the ECB fell short of its responsibilities when lending large sums of money to the peripherals. Much of the problem that the Eurozone faces was caused by their sheer ignorance.

    An executive needs to be personally responsible - indeed it is part of what makes an executive an executive and not a bureaucrat.

    One thought I would have posted on the Slog (had I not been banned) was the question of how this would be enforced. The EU has no army, and even with an army half the size of Britain's, the Germans could wag fingers.

  2. On the immunity clauses, I would strongly assume that the drafters of the ESM took the language directly from the IMF statutes. They match up pretty well word for word.


    And as for why the IMF has them, I think its best to remember that national sovereign states have "sovereign immunity". And that an international fund in the business of lending to sovereign states, and wishing to be able to assert that its loans have legal priority over other loans (like the IMF and ESM do), needs some pretty tough clauses to "level the playing field".

    Otherwise, the IMF and ESM are in the same position as a "vulture fund", legally, as respects the claims on a sovereign defaulter.