The Constitutional Court in Germany, the country’s highest legal authority, has ruled today that the European Stability Mechanism (ESM), which is the permanent eurozone rescue fund, and the European fiscal compact, which stipulates budgetary constraints for each eurozone member, are both legal and not against the German constitution. Simultaneously, the European Commission (EC) has unveiled its draft legislation to empower the European Central Bank (ECB) to become the supervisor of the eurozone’s 6,000 banks from 2013 onwards.
The German Court ruling will be a relief to financial markets, corporations and treasurers as a negative ruling would have legally blocked Germany’s ability to bailout struggling eurozone members such as Greece, Portugal or Spain, which is likely to be the next recipient of aid. The euro immediately rose in value this morning to stand at $1.29 as markets reacted with relief that the on-going project to save the single currency is still viable. The decision allows the German President, Joachim Gauck, to now sign the ESM into law. Germany pays 27% of the fund and is by far the largest contributor.
The Constitutional Court did, however, impose conditions including a cap on Germany's contribution to the ESM, which it ruled could only be overruled by the German parliament. According to the court any future increase in the size of the EUR500bn (£400bn) ESM fund, or of Germany's contribution to it, should only be permitted with the express agreement of the country’s parliament.
Some politicians had been arguing that the ESM commits Germany to unlimited funding of debt-ridden, typically southern, eurozone states and without parliamentary approval it was illegal; a viewpoint that appears to have found some favour with the court. Indeed a petition, which prompted the court case, attracted tens of thousands of signatories in Germany from members of the public, academics and even members of Chancellor Angela Merkel’s own party asking for the court to block the ESM on the grounds that it was undemocratic and unconstitutional, or at least make its use subject to a referendum of German voters. Both appeals were rejected.
The chief justice of the court, Andreas Vosskuhle, said today that it: "rejected the injunctions, with the stipulation that a ratification of the ESM Treaty is only admissible if [certain conditions] can be guaranteed under international law.”
ECB to enforce eurozone banking union
Separately, the EC has set forward its proposals to empower the ECB to supervise the eurozone’s 6,000 banks by giving it the power to grant and withdraw banking licenses, beginning in 2013. The assessments will be made based upon the amount of leverage and the capital ratio strength, or otherwise, of the eurozone’s banks and will prioritise the safety of customer and investor deposits.
According to the EC President Jose Manual Barroso, speaking in his annual ‘state of the union’ address, the supervisory powers of the ECB will eventually be extended to include all non-bank financiers in Europe from 2014 onwards, although it is not clear if this power will extend beyond the eurozone. This is a highly unlikely scenario that would be fiercely resisted by Britain and others but could perhaps be a future political tension on the continent.
The ECB has already done much to support the struggling ‘zombie banks’ in the eurozone with its successive EUR1 trillion Long-Term Refinancing Operations (LTROs) effectively acting as its form of quantitative easing (QE) for banks in the single currency, pumping money into the continent’s struggling banks and economies.
According to the EC the new regime of licenses overseen by the ECB should, “help ensure banks stick to sound financial practice, help tackle the sovereign debt crisis and help prevent future crises”.
Commenting on what the proposals for a single supervisory system of the eurozone’s banks means for those institutions outside the single currency, such as Britain, the EC added in its prepared statement that: “The new system will also help to protect the UK financial system and there will be strong safeguards to protect the interests of the UK and other non-euro area countries.”
It is no doubt true that the new system will have benefits but any regulatory overreach or grab for extra power beyond the eurozone is likely to induce fierce political arguments in future. As it is some countries within the eurozone are already wary of increasing European integration and an erosion of nation's individual rights.
For a ‘banking union’ and single supervisor to truly work countries must give up some of their sovereign power and some – both within and outside the Eurozone – are reluctant to do this. As Nicolas Veron, a specialist in EU fiscal policy at the Bruegel think-tank, said in his initial response to the outline proposals, “the challenge is gigantic".