German Constitutional Court on the ratification of the ESM Treaty and of the Fiscal Compact

On the 12^th September 2012, the German Constitutional Court issued its much-expected third judgment on the constitutionality of measures that have been taken at the level of European and international law in response to the ongoing sovereign debt crises in the Eurozone and the crisis of the currency union that resulted thereof.

Although the decision as such bears nothing revolutionary, the interesting issues of this case lay in its details, particularly the parts of the decision regarding the representation of the German parliament in the ESM and the lack of termination clauses in both treaties. This is why I am going to do a rather detailed summary of the applicants’ arguments, of the government’s opinion and the court decision first and only comment on the case in the second part of this entry.

The procedural facts: The applicants tried to obtain temporary injunctions. Their essential effect would have been to stop the ratification process of the Treaty on the European Stability Mechanism (TESM), of the Treaty on Stability, Coordination and Growth (TSCG) and the amendment of  Art. 136 TFEU through the simplified treaty revision procedure.

The court undertook a summary review of the constitutionality of the challenged acts. It argued that if Germany ratified the treaties and therefore entered into obligations under international law, their cancellation would not be easy if then, in the principal proceeding, the court held that the challenged acts were in conflict with the constitution.

The applicants’ arguments: Essentially, all applicants relied on Art. 38 of the German Basic Law (Grundgesetz – GG) and asserted a violation of the overall budgetary responsibility of the German parliament. This results from the constitutional principle of democracy (Art. 20 (1) and (2) and Art. 79 (3) GG). Invocations of other constitutional rights by single applications, notably regarding the often-discussed issue of ‘expropriation of the taxpayer’ through the decreasing value of his property (via inflation) (Art. 14 GG) were held inadmissible by the court.

Regarding Art. 136 TFEU and its new paragraph (3) which allows Eurozone Member States to create loan facilities, the applicants argued that it was clarifying in intent but constitutive in nature. Therefore, adopting such a provision through the simplified treaty revision procedure (Art. 48 (6) TFEU) was illegitimate, especially because it had been kept so general in its wording.

Regarding the TESM,  ratifying it would mean that the German parliament would breach the constitution by depriving itself of its budgetary autonomy, the TESM leading to “automatized guarantees and transfers”. The transfer of decision-making powers on budgetary matters to the ESM would only be in compliance with the principle of democracy, if the parliament was involved in the ESM’s decisions. The applicants concede that through the members of its board of governors, a link to national parliaments was, however, maintained. The board of governors is the main decision making body of the ESM and shall consist of signatory states’ government members with responsibility for financial matters. The problem that remained was that Art. 34 TESM foresaw the subjection to professional secrecy for members of the board of governors and that this could hinder proper information of the member’s national parliament. A further major issue of the ESM was the lack of its limitation in time. This left a possibility of losing a veto position if other states joined the ESM, considering also the limited applicability of Art. 62 VCLT (clausula rebus sic stantibus).

Third, the applicants invoked that although the TSCG did not change the current state of the law significantly, the “constitutional debt limit obligation” introduced through Art. 3 (2) TSCG would violate constitutional rights. The principal reason is that the budgetary constitution foresaw only an obligation to reduce deficit, not debt.

The government’s position: The German government was heard and found all of the applicants’ claims unfounded. German participation in the ESM’s decisions would be guaranteed through its voting provisions: For most decisions, unanimity was required. In those cases in which only a qualified majority was needed, Germany would have a veto position (because the voting power is calculated according to the shares of  subscribed capital in the ESM ). Budgetary autonomy of the parliament was not endangered because the ceiling was agreed-upon ex ante (by the parliament itself). Concerning the termination issue, the government considered Art. 62 VCLT to be applicable. Interestingly, the government also used an economic argument, saying that the damage of a default of a member state of the currency union would exceed the amount for which Germany had to guarantee by far.

The court’s decision: Regarding Art. 136 (3) TFEU, the court said that the new possibility of establishing loan facilities for Eurozone members did weaken the principle of national budgetary autonomy, but that this weakening was balanced through the stabilizing impact such ‘aid payments’ have on the currency union. Art. 136 (3) TFEU did not put a stability mechanism in place; it only enabled the states to do so. In fact, states concluded a treaty under public international law that had to go through a parliamentary ratification process. For that reason alone, parliaments were not deprived of their power.

Regarding the TESM, it referred in large parts to its decision of 7 September 2011. There it had explained in detail why budgetary powers cannot be transferred to other institutions. After a more general reference to the principles of price stability and of a ‘stability union’, the court discussed the following main questions:

(1) Can the German member of the Board of Governors be excluded from any decision that would have an impact on the national budget? It specified that the German parliament had to keep the ‘callable capital’ ready so that the possibility foreseen in the TESM of the Board of Governors’ member being excluded from the voting procedure because the member state failed to comply with its payment obligations (Art. 4 (8) TESM) would not become reality.

(2) Can the guarantee ceiling be raised and what problem can this pose? The court regarded it as sufficient that for such raises of the original guarantee ceiling, unanimity within the Board of Governors was required. Therefore, the participation of the German member was guaranteed. He or she would make sure that the budgetary responsibility of the parliament is upheld. The court stressed that even if the ceiling was not mentioned in every single provision regarding capital calls, all provisions of the TESM must be interpreted in a way that a raise of the ceiling without the consent of the German member of the board of governors would not be possible. The court also held that such an interpretation had to be assured through public international law before ratification.

(3) How to make sure national parliaments have access to information? It decided that the professional secrecy and document disclosure provisions of articles 32 (5), 34 and 35 (1) TESM did not have to apply with respect to the national parliament. Parliamentary control of the ESM had to be possible and therefore, it needed to have access to the necessary information. This had to be ensured by a reservation to the treaty before ratification.

(4) Are the concerns of the TESM breaching the prohibition of monetary financing justified? They are not. The TESM had to be interpreted in conformity with EU law (and its prohibitions of monetary financing).

(5) Is the lack of a termination clause a problem? No. The ex-ante determination of the ceiling made a termination clause in the TESM unnecessary.

Regarding the TSCG, the court stated that a state can commit itself to a certain budgetary policy and that such a self-commitment was not anti-democratic as such.

(1) It specified that as far as the correction mechanisms towards the medium term objective through national provisions were concerned (Art. 3 (2) TSCG), the European Commission could only outline the objectives and the time frame, but not make any suggestions on the substance of national budgets.

(2) Regarding the termination of TSCG, which was, like in the TESM, not directly foreseen by the treaty, the court argued that a change of circumstances would certainly allow a termination through Art. 62 VCLT and it even considered the termination under Art. 56 (1) (b) VCLT possible out of democratic reasons.

Comments: As has been said by other commentators, the decision bears nothing revolutionary and is in line with the courts’ other decision on European matters. The court refrains from making any economic arguments about the extent of the ceiling and its impact on the budget or on the efficacy of the ESM per se. Like in its previous two loan facility judgments, it also does not make notable points on questions of European law, in particular on the provisions on economic and monetary policy.

What is interesting about the reception of this decision is that although the court has been sometimes regarded as an advocate of parliamentary democracy in Europe, a lot of its argument is based on the fact that Germany has a veto position through its 27,1464% contribution. For qualified majority decisions (80% required) only France has a similar position, for emergency procedures (85% required) also Italy. For other countries, the possibility of being over-ruled in the ESM procedures that do not require unanimity and therefore finding one’s budgetary autonomy compromised by actions to which one did not explicitly consent was a major constitutional issue (e.g. Estonian Supreme Court Case No. 3-4-1-6-12, 12 July 2012 ).

It is, however, noteworthy, that the court considers the parliament’s interests in the ESM sufficiently represented by its member on the Board of Governors who is simultaneously a member of government (Art. 5 (1) TESM) – since it is the parliament that ratified the ESM and therefore consciously equipped the member of the Board of Governors with this power. The issue of capital raises that can be decided with the consent of the German member of the Board of Governors still poses problems of separation of powers. Another point is that in its decision of 28 February 2012 regarding the amendment of the EFSF framework agreement from July 2011 and the German law of assent thereto, the court had actually held that except for secondary market operations (that were one of the added instruments under the amended EFSF agreement) no decision regarding the extent of Germany’s contribution could be taken only by a sub-committee of the budget committee of the parliament for the sake of emergency, but had to be taken by the plenary. Because of the functioning of the EFSF – the commitments of its members raising once one member ‘dropped out’ because it became a beneficiary – the parliament would practically decide about each new country making use of the loan facility – and had to do so through the plenary. Now, the plenary is sufficiently represented by one member (who is part of the government).

Regarding the missing termination clauses in both treaties, the rather general reference to the clausula rebus sic stantibus of Art. 62 VCLT by the court is rather disappointing, in particular knowing how difficult it is to argue a change of circumstances under public international law. An additional fact is that the main tone of EU crisis management so far (in particular basing the EFSM on Art. 122 (2) TFEU) was dominated by the ‘exceptionality of the circumstances’. The Six-Pack and TSCG already contain ‘safeguard clauses’ referring to possible deviations from objectives in cases of ‘exceptional circumstances’. The termination of the treaties on economic grounds would therefore require the current situation to change for the much better or for the much worse. Another interesting element of this argument is that the court undertook a summary review in a procedure for injunctions because it argued that a withdrawal from the treaties would not be so easy after ratification – even if the court would then rule in the principal proceeding that the ratifications were unconstitutional. Would a constitutional court decision therefore not amount to a change of circumstances under Art. 62 VCLT?

Despite these issues, it has to be said that the court managed to maintain the delicate balance between the necessity of keeping the crisis containment measures functional for the sake of the currency union on the one hand and constitutional limits and democratic requirements on the other hand. Under the difficult circumstances, maintaining this balance is a big achievement. In some regard, it also showed that constitutional review and democratic legitimacy are operational in times of crisis and are sometimes wrongfully accused of lack of efficiency or pragmatism.