German Constitutional Court decides not to provoke a major economic crisis after all

That would be the accurate headline in tomorrow’s papers given today’s verdict by Germany’s Constitutional Court. But it is unlikely that any newspaper concerned about its circulation will print it.

Whatever the pre-verdict media frenzy, the simple fact is that a verdict from Karlsruhe that would have seriously threatened the introduction of the ESM would immediately have threatened to unravel the efforts by European and national policymakers during recent months to stem the crisis. That risked a renewed and probably dramatic downturn. There was no way that was going to happen. As somebody once said, even constitutional lawyers read newspapers.

In this context it is worth pointing to a certain irony in critics of European measures, outraged about the lack of ‘democratic legitimacy’ of institutions like the European Commission and ECB, having recourse to a body consisting of eight appointed officials from a single member state. How democratic would it have been for such an institution to effectively overrule the clearly expressed view of the European Council (and thus elected national governments) that a European Stability Mechanism is needed? How could the resulting economic chaos be legitimately explained by reference to the view of these eight people – perhaps on a five-to-three majority – concerning the (in)compatibility of the ESM with the constitution of a single member state drafted more than half a century ago? The nice red hats are unlikely to suffice.

The ‘but’ in the Constitutional Court’s ‘yes, but’ verdict is of a comparatively minor nature. Legal reassurance has to be provided that there is indeed a cap on the size of the fund – as the Treaty seems to clearly imply, but where some observers see unacceptable wriggle-room – and that the German Parliament will be adequately informed about the activities of the ESM. I am not a lawyer, but I find it hard to believe that the greatest legal minds in Europe will encounter great difficulties in finding appropriate solutions.

Before cheering today’s decision, however, an important point must be recalled. Yes, Europe needs the ESM, or at least something very like it. Together with the OMT measures recently announced by the ECB (see here) it is key to ending speculation against government bonds, reducing interest payments and thus meeting a necessary condition for recovery. (The Court has also reserved the right to look more closely at the OMT, but the result will almost certainly be the same.) The problem is that the ESM is linked to the requirement to enshrine a debt brake in national constitutions. This is a very bad idea indeed. ECB support for troubled member states under the OMT is conditional on that country being under a programme. That means that the price is stringent short-term austerity. And ratification of the ESM means the generalised implementation of debt-brakes and thus longer-term fiscal austerity (where sovereign debt is high) and sharply limited space for counter-cyclical fiscal policy. This is a recipe for crisis perpetuation in the countries worst affected by the crisis and longer-term stagnation across the entire currency area.

In short, despite the media interest, Karlsruhe was essentially a sideshow. The fight is on to meet the sufficient conditions for crisis resolution and recovery. And that means changing the substance of the austerity packages and the envisaged national debt brakes.


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  1. Ilir Deebran says

    It’s impossible to understand inflation without having a better understanding of economic growth. Alex Gheg has a new consumer theory that gives us a scale for growth that measures previously hidden thoughts. We can measure utility growth using the body clock. Quantity, quality, variety and convenience in one equation.