A Perspective on the preliminary decision of the German Constitutional Court (BVerfG) of September 12, 2012 regarding the ESM and Fiscal Pact


By Anna E. Caldwell



This preliminary decision does not give any final answers, and while celebrated by Chancellor Merkel, Finance Minister Schäuble and the majority of the German parties as a positive step towards "more Europe", German economists and intellectuals have critcized the decision.  Even though the Court approved the ESM in general, it attached two conditions  and demanded their effective implementation - all of which could leave the financial markets and investors in limbo for the present time.


 1.  Condition:   The Court limits Germany's total ESM liability to 190 Milliarden  Euro (1 Milliarde equals 1 billion in the US) or 27% of the overall amount.  This prevents Germany from unlimited joint and several liability for 700 Milliarden Euro and there will be insufficient funds for a bail out of Spain and Italy.  The ESM requires all member countries to pay in an initial small amount of money in cash, with the rest as guarantees which can be called in later.  It is questionable whether all cash payments will be made promptly  and whether all guarantees will be collectible.   Prior to the Court's decision it was anticipated that the ESM could quickly provide the full amount of 700 Millarden Euro for a bail out of Spain and Italy, with Germany being called on to pay the full amount. That will not happen, however, the Court left a backdoor open by holding that the German parliament could issue an explicit vote for an increase above and beyond 190 Milliarden Euro. 


2. Condition:  The Court demands that the German parliament be fully informed by ESM committees and requires that there be no secrecy.  That the Court felt it had to make this provision has made many Germans nervous since it is considered self-understood that our parliament is fully informed before they vote on a proposal.


3.  Implementation:   The Court held that Germany must make it clear to all ESM partners that Germany does not want to be bound by the ESM contract if the two conditions are not accepted.  Germans question whether this requirement is realistic and how it will be implemented.  Further delays and disputes are anticipated while trust in the government continues to falter.


Overall the mood is somber and everyone understands that the no-bailout clause of the Lisbon treaty has been, and will be ignored and violated.  Along those lines is it understood that the ECB ignores its own statute forbidding the financing of national governments.  President Draghi's announcement that the European Central Bank (ECB) will buy unlimited amounts of debt papers from crisis member states such as Spain and Italy is widely considered the most dangerous move yet.   Printing money is not within the authority of the ECB.  Inflation in Germany is currently  2.6 % - 1.4% in the US, and the fear of hyperinflation grows. Investor George Soros' advice for Germany "to lead or leave" is discussed.


The Court addressed the ECB issue of buying member countries' debt papers in its decision, saying that it had doubts whether the program is constitutional, and announced they will explore the issue in their upcoming final decision. Other discussions include references to the right of participating countries to file a complaint against the ECB with the EuGH (European High Court).  


Overall, Germans are resigned to the fact that the ESM will start in October 2012, the ECB will buy debt papers from crisis countries, and the German government will make accommodations in line with the demands of the EU, ECB and the banking industry.