German High Court’s ESM, Fiscal Pact Decision May Take Months

July 11 (Bloomberg) -- Germany’s top court said a decision on whether to suspend legislation for the euro bloc’s permanent bailout fund and fiscal treaty could take months rather than weeks due to the complexity of the ruling.

The Federal Constitutional Court in Karlsruhe heard arguments yesterday on whether to put German approval of the European Stability Mechanism and fiscal pact on hold until it rules on their legality. Both houses of parliament approved the new laws on June 29 with a two-thirds majority. German President Joachim Gauck withheld his signature due to legal challenges that were discussed at the hearing.

“The legislature fundamentally holds broad leeway for discretion, which the constitutional court must

respect,” court President Andreas Vosskuhle said, adding that the principle counts particularly with a two-thirds mandate. Still, “arriving at a decision is not easy in many respects.” He signaled the court may take a more deliberative approach to its initial decision, potentially further delaying the ESM from coming into force.

The complaints targeting the ESM and fiscal pact were brought by a group of lawmakers, academics and political groups filing separate suits seeking an injunction. They argue that the legislation designed to overcome the three-year-old debt crisis transfers constitutionally mandated authority from German lawmakers to Brussels and undermines democratic rule.

Worsening Crisis

Vosskuhle at one point asked Rolf Strauch, a board member for euro-area’s temporary bailout fund, what the effects would be if the court took a longer time -- months rather than the usual few weeks -- to decide on an injunction.

“I think a time frame of two or three months, or even longer, would be quite risky,” Strauch responded during the hearing which lasted almost 11 hours.

The court didn’t say when it will make its ruling.

German Finance Minister Wolfgang Schaeuble warned that a delay in the activation of the ESM “could lead to a significant worsening of the current crisis.”

An injunction “could mean huge broader uncertainty in markets far beyond Germany and a huge loss of confidence in the euro area -- and in its ability to make necessary decisions in sufficient time,” Schaeuble told the court.

Yet the Finance Ministry said in a statement yesterday after the hearing that Chancellor Angela Merkel’s government is “confident” the ESM and the fiscal pact are in accord with the constitution of Europe’s biggest economy.

The euro fell to a two-year low of $1.2235 in New York trading yesterday, and traded at $1.2255 at 9:49 p.m. yesterday in Frankfurt.

‘No Guarantee’

German Bundesbank President Jens Weidmann told the court that while stopping the ESM and fiscal pact would pose risks, “a quick ratification of the ESM and the fiscal pact is no guarantee that the crisis doesn’t worsen.”

Among the plaintiffs are the group “More Democracy,” which filed its suit on behalf of some 23,000 people who signed a petition saying that “parliaments are being disempowered.” Lawmakers from the opposition Left Party -- the successor to former East Germany’s ruling communists -- as well as Peter Gauweiler, a lawmaker from the Bavarian sister party of Merkel’s Christian Democrats, also filed briefs.

Yesterday’s hearing didn’t assess the legality of the laws. Instead, the court will decide whether the complaints have sufficient merit to stop the legislation before it makes a final assessment on whether it’s constitutional. The ESM and fiscal pact would go into force if the court rejects the complaints and President Gauck signs the legislation.

Court’s Record

Germany’s high court has a record of approving EU integration with caveats. A 1993 judgment cleared the European Union’s Maastricht Treaty, which gave birth to the euro. At the time, the judges said Germany must ensure that EU rule making remains democratic. The court threw out a 1998 lawsuit aimed at stopping the euro as “manifestly unfounded.”

Last September, the court rejected challenges to German participation in a bailout for Greece and in Europe’s temporary rescue fund. It ordered Merkel’s government to seek special parliamentary approval for bailout payments.

Vosskuhle, in a Sept. 26 television interview, said the high court must “fundamentally accept it” if lawmakers concluded that those commitments don’t overstretch German resources. “We’re not a political branch of government.”

The court’s view since the Maastricht ruling has been “that European integration requires democratic responsibility and that the parliament is at the center of this responsibility,” the chief justice said on ZDF television.

Vosskuhle directly addressed the issue of democratic legitimacy in his opening statements yesterday.

Democracy

“Europe needs democratic, constitutional states just as democratic, constitutional states need Europe,” Vosskuhle said. “Whoever reduces this relationship to one side loses the other.”

German Deputy Finance Minister Steffen Kampeter pointed to parliament’s cross-party vote in favor of the ESM and said he expects the high court to reject a delay.

“I don’t expect anything on the baseline to change,” he said in an interview with Maryam Nemazee on Bloomberg Television’s “The Pulse” in London on July 9.

“There might be challenges we have to solve,” he said. “But in general there is a strong commitment, not only by the government in Germany, but by the opposition, with a two-thirds majority, to support the establishment” of the ESM.

--With assistance from Karin Matussek in Berlin. Editors: Leon Mangasarian, James Kraus

To contact the reporter on this story: Patrick Donahue in Karlsruhe, Germany at pdonahue1@bloomberg.net; Tony Czuczka in Berlin at aczuczka@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net