Wake me up when September Ends

by Carsten Brzeski

The German Constitutional Court will present its verdict on the European Stabilty Mechanism and the fiscal compact on 12 September. A reversal of the ESM looks unlikely, but more powers and control to the German parliament would limit the often called for flexibility of the ESM already from the start.

At least one European institution does not seem to see a need to rush. The German Constitutional Court announced on 16 July that it will present the final verdict of the expedited proceedings on the ESM Treaty and the fiscal compact only on 12 September. This is later than expected. Normally, the so-called fast-track procedure leads to final decisions after three weeks. It is broadly expected that the verdict on the expedited proceeding could already encompass a decision on the “normal” lawsuits filed against the ESM and the fiscal compact.

The common denominator of the several filed lawsuits is that the ESM would lead to unlimited risks and liabilities for German taxpayers. Moreover, the ESM would undermine the national sovereignty on the national budget. The complainants argue that the ESM would fundamentally change Europe, while the German government has always answered that both the ESM and the fiscal compact were only necessary requirements to ensure the stability of the euro as provided in existing European Treaties.

Basically, there are three possible scenarios: 1) an unconditional yes to the two Treaties; 2) a conditional yes to the two Treaties, asking for more control powers and responsibilities for the German parliament and 3) a refusal of the two Treaties. Obviously, the third option would lead to sheer chaos on financial markets as it would reverse all rescue efforts taken over the last two years. In our view, however, this outcome is highly unlikely and would not be in line with past verdicts. The other two options would finally give the green light for the ESM. Our current take on the most likely outcome is along the lines of an earlier verdict by the Constitutional Court, which had given the German parliament a veto right for all eurozone bailouts. In this scenario, however, the often called for flexibility of the ESM would obviously be reduced or limited already at the start.

An announcement of the German Constitutional Court’s verdict on the ESM in September should still be quick enough not to derail markets, but will not lower uncertainty in the coming weeks. Maybe even more important, the upcoming verdict is another reminder that the destiny of the monetary union is not exclusively in the hands of policy makers. It might be an irony of fate that on the day of the Court’s announcement there will be a second event which could also have an impact on the eurozone crisis management: the Dutch elections.

All of a sudden it looks as if the month September, rather than June or July, will bring new milestones in the eurozone crisis. It might not be their favourite music style, but with two crucial upcoming events that are out of their direct influence, eurozone policymakers might start humming the tune of a successful hit of the American rock band Green Day. “Wake me up when September ends.”

Dr. Carsten Brzeski (Carsten.brzeski@ing.be) is Senior Economist at ING BELGIUM SA/NV – Economic Research.