German court rules in favour on German participation in bailout funds

German chancellor Angela Merkel scored a major victory today as Germany’s Constitutional Court ruled against complaints of Germany’s participation in eurozone aid packages. But it also noted the Bundestag must “specifically approve every large scale aid measure of the Federation” in future.

Germany’s highest court ruled there had been “no violation of the Bundestag’s budget autonomy” in Germany taking part in various eurozone support packages.

The court said: “In today’s judgment, the Federal Constitutional Court has rejected as unfounded constitutional complaints which are directed against German and European legal instruments and other measures in connection with the aid to Greece and with the euro rescue package.

“The German Bundestag did not impair in a constitutionally impermissible manner its right to adopt the budget and control its implementation by the government or the budget autonomy of future Parliaments.”

It added that German law demands, “the decision on revenue and expenditure of the public sector remain in the hand of the German Bundestag as a fundamental part of the ability of a constitutional state to democratically shape itself.

“As elected representatives of the people, the Members of Parliament must remain in control of fundamental budget policy decisions in a system of intergovernmental governance as well.”

The court also ruled on the Monetary Union Financial Stabilisation Act
giving authorisation to provide aid to Greece, and on law around providing guarantees for the European Financial Stability Facility.

However, it did not write a blank cheque for Angela Merkel.

It noted “when establishing mechanisms of considerable financial importance which can lead to incalculable burdens on the budget, the German Bundestag must ensure that later on, mandatory approval by the Bundestag is always obtained again.

“In this context, the Bundestag…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.

“Every larger-scale aid measure of the Federation taken in a spirit of solidarity and involving public expenditure at international or European Union level must be specifically approved by the Bundestag. Sufficient parliamentary influence must also be ensured with regard to the manner in which the funds that are made available are dealt with.”

Merkel has already agreed to consult lawmakers on further major involvement in aid packages. She will react to the ruling formally in a speech in parliament today.

Germany’s Constitutional Court in Karlsruhe was asked to decide on three primary matters.

The first matter was whether Germany’s government was violating national law in agreeing the original €110bn bailout to Greece. Then, whether the government should have asked parliament before agreeing to participate in further packages, jointly with the ECB and IMF, for other beleaguered nations. And finally, if it is legal to buy up government bonds of countries like Spain and Italy, to protect the markets.

The case against Berlin was brought last May by six eurosceptic plaintiffs, a mixture of five academics and one lawmaker. They are Karl Schachtschneider, Wilhelm Hankel, Joachim Starbatty, and Wilhelm Noelling, Dieter Spethmann and Peter Gauweiler.

They argued German participation in the various packages ignores the budgeting rights parliament holds, and the right to democratic representation, and protection of property. They believe Merkel and her finance minister Wolfgang Schaeuble are exploiting the eurozone’s troubles to make the EU a unified state.

At a court hearing in July presiding judge Andreas Vosskuhle hinted that the plaintiffs may have a difficult case: “Europe’s future and the right economic strategy to tackle the debt crisis isn’t debated in Karlsruhe, that’s the task of politicians not of judges.”

Holger Schmieding, chief economist at Berenberg Bank said before the ruling it was “highly unlikely the court will find the move illegal”, but any crimping of Berlin’s ability to help would put extra pressure on the European Central Bank.

Germany already contributes about 27% of the €440bn rescue fund known as the European Financial Stability Facility, which has been drawn upon to bail out Greece, Ireland and Portugal. Germany’s contribution is about 25% more than the next largest backer, France.

Merkel has argued against excessive enlargement of the EFSF, although she is arguing to increase the portion of Germany’s EFSF loan guarantees from €123bn to €211bn.

Asset managers and some of her eurozone peers have called for greater expansion of EFSF reserves, as they fear Italy and Spain could also soon need help.

Provisions attached to draft legislation being intrduced to parliament today will give parliament the right to decide how Germany should participate in the EFSF in future.

The parliament will also have the opportunity to react to today’s news in a vote at the end of September on approving changes to the rescue fund.

Voters, meanwhile, will have their own chance in forthcoming regional elections in Mecklenberg Western Pomerania. Merkel may find her toughest hurdle is here – the Economist magazine noted in 2009 that almost 80% of Germans trust the Karlsruhe court, but fewer than half trust the Bundestag.

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