In times of crisis the boundaries of the law are sometimes stretched. This is also the case in the euro crisis. Very exceptionally, last week the European Court of Justice, sitting as a full court, gave its blessing to the permanent emergency fund ESM. It dismissed the complaints of the Irish member of parliament Pringle against the establishment of this stability mechanism. As a result, financial support to Member States in need is secured for the near future. Just like the Bundesverfassungsgericht did last September, the European court has shown sense when it comes to the political reality.
Rejection of the ESM would have most certainly led to the doom scenario of a Greek exit or even the collapse of the euro zone. Yet is surprising that the European Court of Justice and the court in Karlsruhe think very differently about the central prohibition on bailout. Where the German judge recognizes that the euro zone has fundamentally changed as a result of the crisis, the European judge holds a different opinion. Both courts will soon be confronted with the repercussions of their decisions.
According to the German constitutional court a new reality has come into existence in the euro zone. The no-bailout clause has therefore been mitigated. The court considers this permissible as the prohibition on monetary financing still stands. But the European judge is of the opinion that nothing has changed. The possibility of ‘granting financial assistance by one or more Member States to a Member State which remains responsible for its commitments to its creditors’ has always been possible under the no-bailout clause.
Soon the Bundesverfassungsgericht will have to speak out on the compatibility of the bond buying programme of the ECB with the prohibition on monetary financing. After all, the importance of the ESM not only lies in its fire power of €500 billion, but in its linkage to the nearly unlimited financial means of the ECB. The bank has announced that it will resume its bond purchases provided that Member States lodge a request for support with the ESM.
Furthermore, the reasoning of the European Court that the currency union has not changed by the introduction of the emergency fund is not fully in line with the original meaning behind the no-bailout clause. This was that Member States have to refinance themselves on the markets and cannot in principle be supported by their European partners. The ESM departs from this idea and makes it possible to grant financial assistance for the sake of the stability of the euro area.
Last week the Euro group made a start with cutting Greek debt. It is not unthinkable that a much bigger loss will have to be taken in order to lower this debt to an acceptable level. But can it be upheld that Greece remains responsible for its financial commitments – a condition stipulated by the Court in Pringle in order to qualify for financial support – if a considerable part of it is written off? Will the European Court have to rule on a subsequent occasion that even this voluntary ‘haircut’ was always possible under the no-bailout clause? That would be stretching the provision considerably.
But this is how both courts, German and European, have approved the ESM. They cannot however offer a definite solution to the crisis; this will have to come from politics. Until then both courts remain pinned to the rack. And to think the ESM is only the start of the transformation of the euro zone….
This blog is an English translation of an article that was published in the ‘Financieele Dagblad’ on 8 December 2012.