08.31.2012 2

Another black September?

Black SeptemberBy Bill Wilson — On September 12, the German constitutional court will be ruling on whether the €700 billion European Stability Mechanism (ESM) violates German sovereignty. The decision could well prove fateful for the future of the entire eurozone — and will likely have ripple effects throughout the global financial system.

It could be a meltdown.

That is because if the court overturns the bailout fund, it would leave troubled sovereigns like Portugal, Ireland, Italy, Greece, and Spain (PIIGS) without a ready means to refinance and expand their gargantuan debts totaling more than €3.3 trillion. Meaning, without extraordinary intervention, massive defaults would eventually follow and the euro itself could fall.

Hold on tight. If the court’s previous rulings on this matter are to be believed, it is hard to conceive of a scenario under which the treaty will stand. However, as those of us in the U.S. know, it is not always easy to predict the contortions judges might undergo when subjected to extraordinary political pressure.

But previously, when the high court upheld the European Financial Stability Facility in part, it warned that “the Bundestag, as the legislature, is also prohibited from establishing permanent mechanisms under the law of international agreements which result in an assumption of liability for other states’ voluntary decisions, especially if they have consequences whose impact is difficult to calculate.”

It is hard not to read this as a serious warning, because that’s exactly what the open-ended ESM bailout fund would do, putting German taxpayers on the hook for the bad debts of Greece, Portugal, Spain, and others.

Article 10 of the treaty allows the ESM’s board of governors to arbitrarily increase the size of the bailout fund: “The Board of Governors shall review regularly and at least every five years the maximum lending volume and the adequacy of the authorised capital stock of the ESM. It may decide to change the authorised capital stock and amend Article 8 and Annex II accordingly.”

Therefore, regardless of how lawmakers vote today in adopting the €700 billion bailout, they would actually be writing a blank check to Brussels. On its face, it creates an open-ended credit line from the German treasury that would be irrevocable.

So, how will the court rule? Recently, the head of Germany’s high court, Andreas Vosskuhle, last year told the Frankfurter Allgemeine, “The sovereignty of the German state is inviolate and anchored in perpetuity by basic law. It may not be abandoned by the legislature even with its powers to amend the constitution.”

He added, “There is little leeway left for giving up core powers to the EU. If one wants to go beyond this limit — which might be politically legitimate and desirable — then Germany must give itself a new constitution. A referendum would be necessary. This cannot be done without the people.”

Seems pretty clear cut. But then again, nobody ever thought Chief Justice John Roberts would play Brutus with the Constitution on Obamacare, either.

While it is not possible to know the future, be prepared. Another black September like we saw four years ago may well be on its way, upsetting the status quo and sending the economy back into a tailspin.

And, if it is anything like the fiasco that resulted in the 2008 bailouts, it will be similarly impossible to predict the aftermath.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

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