Wednesday, 5 September 2012

The €700,000,000,000 bad bank

In one week, on September 12, the German courts will rule on lawsuits regarding the consitutionality of the European Stability Mechanism (ESM, or the permanent bailout fund for Europe). The ESM is seeking to put together a €700 billion bailout fund for struggling EU members. In an article in Spiegel online titled "ESM Permanent Bailout Fund Prepares for Prime Time" the authors write,
The court battle against the permanent euro bailout fund, the ESM, has become the largest in German legal history. Yet despite widespread concerns, fund head Klaus Regling is preparing for action. The most important question surrounding the fund, however, remains to be answered: Will it work?
Some 37,000 Germans have joined the complaint, making it the largest such case in the history of the court. Most prominently, however, the list of plaintiffs includes Peter Gauweiler, a politician with the Christian Social Union, the Bavarian sister party to Merkel's Christian Democratic Union (CDU), former Justice Minister Herta Däubler-Gmelin of the center-left opposition Social Democrats (SPD), and a group of professors led by economist Wilhelm Hankel, a prominent critic of the euro. They all fear that joining the rescue fund necessarily means that Germany's parliament would lose its constitutionally guaranteed right to oversee the budget.
"The ESM undermines the foundation of the European monetary union," says Helmut Siekmann, a professor of monetary, currency and central bank law at Frankfurt University. He says the rescue fund violates the ban on forcing other euro member states to assume liability for the financial obligations of debt-ridden countries.
Siekmann even suspects that the treaty contains a loophole that could raise the upper limit of Germany's liability beyond the legal ceiling of €190 billion. He says that Regling's fund could in fact mobilize more than the €700 billion that has been authorized once it has received the paid-in capital amounting to €80 billion. The only precondition would be a unanimous agreement from the ESM Board of Governors, which includes the finance ministers of euro-zone member states. The fund could then, theoretically, collect unlimited amounts of capital.
Any one of the ministers on the board could veto such a decision, including German Finance Minister Wolfgang Schäuble. "But will he have the backbone to vote no when everyone else is in favor?" asks Siekmann. The legal expert explains that even if Schäuble abstains, according to the treaty, it would be counted as a vote in favor. "That's unusual when a unanimous decision is required," criticizes Siekmann, "and it's problematic." 
For the long term success of both Germany and other European countries, and as a first step in the right direction, let's hope the critics win this case.

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