By Robert Romano — The embattled creditors of Greece, Portugal, Ireland, and other troubled sovereigns breathed a collective sigh of relief as Germany has overwhelmingly approved those creditors’ next round of bailouts. But not so fast.
It’s not over yet.
“It is not at all excluded that the retrofitted European Financial Stability Facility, which is incomparably more dangerous than the first one, could be an object of further constitutional inquiry,” law professor Markus Kerber has promised in response to Germany’s decision to approve amendments to the European Financial Stability Facility (EFSF).
Professor Kerber was recently at the center of a lawsuit against Germany’s participation in the EFSF that had been approved in 2010. Although the court ultimately upheld Germany’s involvement under the original plan, the EFSF’s biggest stumbling block going forward appears to be that very same decision. Why?
The high court also ruled 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.”
This was the part of the court decision that led observers to conclude that the issuance of so-called leveraged “eurobonds” would later be found to be unconstitutional.
Under a literal reading of that ruling, Germany is allowed to increase its stake in the EFSF, which it just voted to do of €211 billion. But, while the original plan was allowed, the EFSF cannot bind Germany to potential losses above its committed pledge. Unfortunately for Europe’s banks hoping for a bailout, that is precisely what EFSF does.
The legislation authorizes EFSF to “finance the making of Financial Assistance by issuing or entering into bonds, notes, commercial paper, debt securities or other financing arrangements (‘Funding Instruments’) which are backed by irrevocable and unconditional guarantees (each a ‘Guarantee’) of the euro-area Member States which shall act as guarantors…”
If the €440 billion fund is leveraged up to €2 trillion — as in a proposal by U.S. Treasury Secretary Timothy Geithner — if those bonds go bad, Germany would be on the hook.
For that reason, one might expect the German constitutional court to strike down the new law. Adding to that likelihood was no less than the head of that court, Andreas Vosskuhle, who recently 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.”
That was a warning.
And while the court might not strike the amended law down en masse, even if they only offered a narrow ruling, the new bonds, if they are stripped of the German guarantee, would not be worth the paper they’re printed on.
Which means Professor Kerber needs to move quickly to have his case heard on an expedited basis. With the rest of the European states not expected to complete voting until mid-October, there is presumably enough time for the court to strike down the new law.
Urgency is warranted, especially since matters will be extremely complicated if the bonds are ruled unconstitutional after being issued.
So, if the new eurobonds are issued prior to a ruling, banks should be warned. As they used to say in ancient Rome, caveat emptor.
Robert Romano is the Senior Editor of Americans for Limited Government.
