Constitutional Court Delays ESM Finding

News that the euro-group finance ministers were able to agree on a first tranche of €30 billion to be transferred to Spain to shore up its rickety banks by the end of July was greeted with a measure of relief by euro area bond and stock markets. At least, so the reasoning went, there was something concrete, a firm number and a firm date. How and when the remainder of the estimated €100 billion in total bailout funds estimated to be required for recapitalizing Spain's banks will be doled out is yet to be decided.


Spain's 10 year yield declines back below the 7% barrier following the latest announcements form the euro-group finance ministers – click chart for better resolution.

Italy's 10 year yield tracked back to just below 6% in sympathy – click chart for better resolution.

Odly enough, Germany's Bund yield fell slightly as well – normally it tends to move opposite to Italian and Spanish yields, but the recent cut in the ECB's deposit ratio to zero may have provided a motive for moving funds into German bonds – click chart for better resolution.



However, as the day went on, another piece of new hit the wires that may receive a less benign reception by the markets: the German constitutional court in Karlsruhe, where a number of complaints against the ratification of the ESM are currently heard and debated, has decided not to come to a decision just yet.

This demonstrates that the court is taking the complaints very seriously. In particular, there appears to be language in the constitution that if strictly interpreted would seem to clash with the fact that Germany's parliament will no longer have full control over the ESM's future allocation of funds once the bailout vehicle becomes operational. Such decisions must be left to the 'German people', so the constitution, or their duly elected representatives. The representatives in turn may not have the power to simply delegate such decision-making to the EU bureaucracy.

The government on the other hand argues that the preamble to the constitution, which contains an exhortation that Germany shall 'work to preserve the peace in Europe' is sufficient justification to make the ESM constitutional.

What the government may underestimate is the degree to which even the judges in Karlsruhe – who once used to wave nearly all European-level decisions by the government through, including the adoption of the euro – may be prisoners to the deteriorating social mood.

The law is always subject to interpretation. No matter how precise it is formulated, men decide what the words actually mean in practice and their judgment is often flawed. More importantly, it usually reflects the social mood of the times. Therefore the decision of the court to continue its deliberations is a sign that the ESM may at the very least require certain modifications if it is to survive the scrutiny of the court.

What is astonishing is how much time the judges say they will need:

The German Federal Constitutional Court may take longer than expected to decide on a request by plaintiffs that it issue a temporary injunction blocking Germany from signing up to Europe's permanent bailout fund and the fiscal pact.

Court President Andreas Vosskuhle announced at a public hearing on Tuesday that the court would undertake a "constitutionally sensible assessment" of the legal complaints that may go beyond normal procedures in weighing temporary injunctions. People who took part in the hearing said it could now take the court up to three months just to decide on whether to issue the injunction. It would then take considerably longer than that for it to reach its verdict on the substance of the complaint — whether Germany is handing over too much sovereignty to European authorities.

The slower-than-usual injunction procedure means a further delay in launching the €500 billion ($613 billion) European Stability Mechanism (ESM), which was to have gone into operation on July 1 but has been stalled by the legal complaints in Germany. Uncertainty about the court's verdict has raised doubts about whether Europe will get the extra firepower it needs to combat the debt crisis.

The German parliament ratified the treaties to launch the ESM and the fiscal pact on debt limits on June 29. But President Joachim Gauck has refrained from signing them into law while the court hears objections from politicians and academics who argue that the measures will infringe on the constitutional role of parliament to decide how taxpayers' money is spent.

Germany is not the only country that has yet to approve the ESM treaty. The fund will become operational as soon as member countries representing 90 percent of the fund's capital commitments have ratified it. Germany is the largest contributor, at 27 percent of the total, so the fund can't be launched without German ratification.

German Finance Minister Wolfgang Schäuble told the country's top court on Tuesday that any significant delay in approving the EU's permanent bailout fund could fuel financial market turbulence.

"A considerable postponement of the ESM (the European Stability Mechanism bailout fund) which was foreseen for July of this year could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the euro zone's ability to make necessary decisions in an appropriate timeframe," Schäuble said."

"Doubts about the constitutional possibility or the readiness of Germany to stem dangers for the financial stability of the euro zone could lead to the current crisis symptoms being exacerbated considerably," Schäuble warned. "Some member states of the euro zone would end up having further big problems financing themselves, which could raise questions over the stability of the euro zone as a whole."

(emphasis added)

It is in the nature of secular downturns that complaints of the sort now heard in Karlsruhe have a much better chance to succeed than at the height of a boom when the social mood is bullish. When a number of economists and legal scholars attempted to get the court to reject the adoption of the euro on constitutional grounds in 1999, they failed completely. Today the court knows that everything these economists predicted at the time has come true.

Of course this fact has per se no bearing on the constitutionality questions that were under consideration then and those that are debated today, but the point remains that the judges have it no doubt at the back of their minds.

The people complaining against the ESM are moreover a motley crew, ranging from far left politicians like Gregor Gisy (the leader of 'Die Linke', a socialist party to the left of the Social Democrats) to conservatives like Peter Gauweiler from Bavaria. Included is also a group calling itself 'More Democracy' that is acting on behalf of 12,000 co-plaintiffs. So the court is also faced with the fact that a broad swathe of society is bringing the complaints.

The upshot is that definitive ratification of the ESM could be delayed by several months. The patience of financial markets will be severely tested if this is in fact the case. Moreover, other countries will no longer deem ratification an urgent matter – which could help trip the whole project up as the contraction becomes more severe and more heads of political incumbents roll.

The times will therefore remain 'interesting' (in the Chinese curse sense) in the near to medium term. Regardless of the fact that the ESM would very likely anyway not have been of sufficient size to truly alter the course of the crisis, the markets will be a tad more nervous if its ratification is held up for so long.

Germany's red-robed constitutional judges in Karlsruhe: ESM ratification held up.

Addendum: US Small Business Confidence Dives Again

Readers should take note that the NFIB small business optimism index has just taken another dive, to the lowest level since October of 2011 (and October 2011 was not a propitious time).


The NFIB Small Business Optimism Index – falling again from what appears to have become a resistance level. This is supposed to be a recovery? – click chart for better resolution.



Once again we are reminded that the US 'recovery' stands on very weak foundations and they are getting even weaker. Not surprisingly, various Fed heads are already thinking of making the situation worse by adding to the central bank's monetary pumping efforts


Charts by: BigCharts, NFIB



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3 Responses to “The Karlsruhe Factor”

  • Over here across the Pond, we Americans need to look long and hard at the clandestine activities of the U.S. Federal Reserve. Since October, 2008, the Fed has expanded its balance sheet by over $3.8 Trillion which adds to the net indebtedness of the citizens of the United States without authorization. This non-transparent organization seems to do whatever it wants to do whenever it wants to do it without the scrutiny of any U.S. governmental body that was elected by the American people under the U.S. Constitution. Absolute power corrupts absolutely. THEY HAVE THROW DEBT AT A DEBT COLLAPSE WITHOUT ANY HOPE OF SOLVING THE FINANCIAL SYSTEM PROBLEMS THAT PERSIST AND GET WORSE UNDER THEIR TUTELAGE. Time to rein them in or even consider abolishing the U.S. Federal Reserve. Look at their track record!!! Failure after failure after failure. Kick the can ain’t a solution to an insolvent U.S. banking system and U.S. Government not to mention increasingly insolvent States, counties, and cities. WE THE PEOPLE are very tired of being the beast of burden for juvenile decisions by public officials.

  • therooster:

    As a massive part of the market, the public has a solution at hand to wash all this debt away.

    We all have premises about the FED. If you reverse engineer, all their actions, the FED has supported a process that takes gold as money (with fixed value) where more liquidity would require more gold and brought it full circle to the point that gold has been/is/will be/ remonetized, but in real-time. The only way to create the reasonably smooth transition is by way of the market. Gold cannot be remonetized and brought into the market by way of a top-down process. It must be organic for the sake of rate-of-change. It’s an ongoing process like an elephant in the room that nobody sees. The ultimate purpose of the USD is that of a real-time measure, a servant to real-time gold-as-money. The dollar’s role since 1971, as a currency, has been nothing but a stop-gap measure until such time that the market would evolve the system back to one based on gold-as-money in REAL-TIME. REAL-TIME is key to all of this. Some evils are necessary in “the script” and the bankers have filled those staged positions extremely well. It’s a tough job as they say. For the record, I’m a strong advocate of gold as money, but realize that its liquidity has historically sucked because of fixed values placed upon it. Now that gold floats, Gresham’s Law is actually reversing. GL was predicated on fixed values on gold. The fixed peg has been the historical problem….. not the bullion. The “fullness of time” has offered much. You cannot pour new wine into old wineskins …. so true.

  • Being the bailout of Spains banks has been put at a minimal amount, even if the markets held up, the bill might be a lot more in 3 months. Paulson got a bazooka and the penalties were such on the banks that they went out and raised new capital. Of course, they were also aided by mark to fantasy accounting and for the time being have been supported. On the other hand, I am not so sure about the European banks, which look prone to sink not only Spain, but possibly France and maybe Switzerland as well. The dominos are lined up. All involved will merely blame Germany for their mistakes. The event was the end result of sking off a cliff.

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