Europe’s Crisis Goes to Court

TILBURG – Throughout Europe and beyond, economists are debating potential solutions to the eurozone’s sovereign-debt crisis. But these discussions often neglect, or at least downplay, one crucial element of any resolution: the German Constitutional Court (Bundesverfassungsgericht) in Karlsruhe, which is responsible for determining whether measures taken by Europe’s leaders are legal under German law.

On September 12, the court will determine whether the European Stability Mechanism (ESM), Europe’s permanent emergency fund, complies with Germany’s constitution. Although German policymakers backed the ESM in June, ratification is on hold until the court’s ruling.

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While other eurozone countries have similar courts, these tribunals have significantly less clout. The Supreme Court of Ireland, for example, has referred such matters to the European Court of Justice. And the recent ruling by France’s highest court that the ESM complies with the country’s constitution received little media attention, highlighting its relative insignificance.

But Germany’s court is far more powerful, making it a decisive player in determining Europe’s agenda. And, given that the court’s verdict regarding the ESM’s constitutionality is crucial to the eurozone’s survival, its authority extends beyond the legal domain, into economics and politics.

Arguments about the euro crisis that disregard the “Karlsruhe factor,” therefore, amount to little more than sterile intellectual debate. For example, most proposals involve some kind of fiscal union, which would inevitably entail the partial transfer of fiscal sovereignty from national governments to the European Union. But the court, not German policymakers, has the final say regarding further fiscal integration.

Recently, some economists and politicians have begun to take notice of the Karlsruhe factor, but most of them mistakenly expect the court to create rules for resolving the crisis. In fact, guidelines were established last September, when the court ruled on which aspects of the European Financial Stability Facility (EFSF) – the precursor to the ESM and the eurozone’s current temporary emergency fund – were unacceptable, and laid out criteria that any potential solution must meet.

For example, the court determined that the German parliament would have to be consulted each time a member country requested assistance, asserting that fiscal sovereignty forms the core of national sovereignty. Otherwise, German voters would be rendered powerless, constituting a breach of the German constitution.

Likewise, the court has prohibited the creation of a permanent European stability mechanism that would entail financial obligations over which Germany’s parliament had no direct control. As a result, decisions taken by European politicians during their regular or emergency meetings may be reversible, particularly if they would undermine the German parliament’s fiscal authority.

It would be a mistake to assume that Germany’s government could ignore or circumvent the court’s decision. Given strong public support for the constitutional court, no German policymaker would consider challenging its verdict. A ruling against the ESM in September would solidify further the court’s central role in determining Europe’s future.

To be sure, the German judges have not overstepped their bounds by defining what action Germany must take. Rather, they have established parameters within which German – and thus European – policymakers are obliged to remain. Simply put, all proposed solutions to the euro crisis must be evaluated according to the court’s rulings.

Moreover, the court decided long ago that only the German public – not the government – may transfer fiscal sovereignty to Brussels. Neither Chancellor Angela Merkel nor the parliament may decide; every viable proposal must be submitted to a popular referendum.

Rather than waste time debating proposals that have no chance of being approved, economists and policymakers should be working within the parameters established by the German court. Indeed, saving the euro will require a comprehensive solution that not only meets the court’s standards, but also enjoys the support of the German public.

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