On 12 September, the German constitutional court ruled that the European Stability Mechanism (ESM) did not violate the country’s constitution. Damian Chalmers argues that the constraints placed on the ESM by the Court in Karlsruhe, that national parliaments must be associated with fiscal transfers and support, mean that national representatives rather than EU officials will have a greater say in the state of countries’ finances.

In the salad days of European integration, its advocates were fond of the tired bicycle metaphor. One had to pedal continually in the same direction or the whole thing would crumble. It was instructive that it was the machine that was the metaphor. The better metaphor may now be that of the cyclist, who will do whatever it takes to ‘just keep riding’ and stay on the bike. In the context of safeguarding European integration, this may include getting poor countries to support richer countries; setting up austerity programmes with exit; or telling taxpayers to prioritise open-ended support of other States over supporting vulnerable members of their own society.

Federal Constitutional Court of Germany Credit: linksfraktion (Creative Commons BY NC SA)

However, the cyclist’s body will only take so much before the chafe manifests itself. Emerging on those body parts most vulnerable to motion, it starts as faint irritation but intensifies, to the point where cycling becomes unbearable. In a consistent line of judgments, of which the most recent was an interim decision on the constitutionality of the European Stability Mechanism (ESM) on 12 September, the German Federal Court has set up the chafe. It suggests two pressure points that will not go away.

First, Germany’s constitutional democratic identity requires that the Bundestag has responsibility for the budget. If it cannot decide Germany’s finances, then it is unclear what it can do and consequently, what remains of German parliamentary democracy. Significant constraints must neither be placed on its budgetary decision-making nor should significant revenue and expenditure decisions be delegated elsewhere.

Secondly, transfer of monetary powers to the Union is only constitutional if the monetary union is a ‘stability community’ whose primary objective is price stability. The ECB is independent and is prohibited from ‘monetary financing’ which might compromise its independence or commitment to price stability.

Regarding the Bundestag’s budgetary responsibility, the Court noted that revenue and expenditure decisions which are not so large or indeterminate as to compromise the Bundestag’s autonomy could be delegated. However, the rubbing effect of chafe then crept in, as within these limits, the effectiveness of Bundestag involvement in monitoring financial commitments must increase concurrently with the size of these commitments.

This provided the basis for the fine-grained analysis of the ESM and the constraints placed upon it. These boil down to sheltering Germany from incurring new liabilities without Bundestag approval and a condition that the latter be informed of the ESM’s significant operations. However, unaddressed, chafing strengthens. If all this makes the Bundestag a central player in the functioning of the ESM, it also reveals new uncertainties.

One concerns substantive and procedural fiscal constraints placed on Eurozone States by the fiscal compact. Any number seems to breach the principle of parliamentary budgetary responsibility. The proposal that national parliaments look at budgets within a restricted time horizon and only after the Commission and the EU’s Economic and Financial Affairs Council (ECOFIN), and the requirement now applicable to most Eurozone States against cutting taxes without equivalent spending cuts, are two examples.

Another uncertainty mentioned in the judgment is ECB purchase of government bonds. Until now, this had been deemed compliant with the prohibition in Article 123 TFEU on direct purchases on the grounds this was being done in the secondary markets. The Court indicates that it violates the prohibition on monetary financing. And so that markets understand the import of this, it has indicated that it will look at the Outright Market Transaction scheme in its final judgment in light of this.

That scheme is seen by many as the big bazooka of the ‘Whatever It Takes Approach’: a source of unlimited finance in a Europe with limited capital. Doomsday scenarios will no doubt be duly painted if it is declared illegal. Is this the end of European life as we know it or merely the end of the ‘Whatever It Takes Approach’? For the chafe is always easily remedied. And it is no different with the German Court which is insisting on two reasonable and attainable things.

First, national parliaments should be intimately associated with fiscal transfers, imposition of fiscal constraints and monitoring of adjustment programmes. They, and not Commission or ECOFIN executives, should be at the heart of these decision-making processes. Moreover, COSAC represents a forum through which this can be realised.

Secondly, financial support should not occur through surreptitious, unaccountable processes of central bank bond purchases at rates that debtor States’ citizens will curse bitterly in years to come. It should be done through the committed programmes formally established by parliaments, most notably the ESM, for these offer better trading terms for debtor States and more secure assurances for creditor States. If these have insufficient funds, national parliaments must debate the consequences, and faith must be placed in their powers of judgment.

Paradoxically, that could lead the crisis-stricken European Union to recover some measure of democracy, not only for its tarnished brand but also through allowing national representatives rather than hedge funds or officials to have a greater say in the state of public finances.

And if these representatives were opposed to financially supporting other States? Well, it would be an admission that European integration and solidarity occupy limited weight vis-à-vis other priorities in our democracies. And that seems preferable, notwithstanding the possible costs, to Whatever It Takes…

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Note:  This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics. 

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About the author

Damian Chalmers – European Institute and Department of Law, LSE.
Damian Chalmers is Professor of European Union Law at the London School of Economics and Political Science. He is also a Jean Monnet Chair and editor of the European Law Review and EU Jurist. He has held visiting posts at the College of Europe, Instituto de Empresa and the National University of Singapore.  His most recent book (with Gareth Davies, and Giorgio Monti) is, European Union Law: cases and materials (Cambridge University Press, 2010).

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