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Ambrose Evans-Pritchard

Ambrose Evans-Pritchard has covered world politics and economics for 25 years, based in Europe, the US, and Latin America. He joined the Telegraph in 1991, serving as Washington correspondent and later Europe correspondent in Brussels. He is now International Business Editor in London.

Legal noose tightens on Europe's monetary union

 

By Ambrose Evans-Pritchard Economics Last updated: July 8th, 2010

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The plot continues to thicken at Germany’s constitutional court, a body with power of life or death over Europe’s monetary union.

Contrary to general belief, Germany’s eurosceptic professors have not abandoned their legal efforts to block the EU rescues for European banks exposed to Greek debt, and since May 7 for banks exposed to debt from Spain, Portugal, and Ireland as well.

Should they succeed, of course, the eurozone risks disintegration within days, and perhaps hours. I am not sure that investors in New York, London, Tokyo, Beijing, or indeed Frankfurt quite understand this.

There are now four cases at the court – or Verfassungsgericht – arguing that these disguised bank bail-outs breach multiple clauses of EU treaty law, and therefore breach Germany’s supreme and sovereign Basic Law.

A quintet of professors – Wilhelm Hankel, Wilhelm Nölling, Joachim Starbatty, Karl Albrecht Schachtschneider, and Dieter Spethmann (ex Thyssen CEO) – have just broadened their complaint over the Greek part of the bank rescue to include the new €440bn Stability Facility, which breaks EU law at every turn.

It also covers the European Central Bank’s mass purchase of Greek, Spanish, Portuguese, and Irish bonds from private banks. This enables investors who bought these bonds during the credit bubble in order to boost yield – just as they bought US subprime CDOs to boost yield – to shift the consequences of their own misjudgements onto taxpayers (Hedge funds were already “long” Club Med debt, of course, when the ECB stepped in so they simply make a speculative gain from taxpayers).

It has been widely reported by the German press – which should know better – that the court rejected the original case by the professors. This is untrue. Their request for an immediate injunction to block transfers to Greece was turned down (on the grounds that such a move would be too dangerous). The case is still pending.

In their latest broadside the professors said the rescue fund “self evidently” violates the no-bailout clause of the Lisbon Treaty.

They have seized on comments by France’s Europe minister Pierre Lelouche, who admitted after the summit deal on May 7 that EU leaders had carried out a constitutional coup. “It is expressly forbidden in the treaties by the famous no-bailout clause. De facto, we have changed the treaty,” he said.

The quintet said the methods used to ram the EU rescue through the Bundestag were a “putschist” threat to German democracy. “This path is leading Germany to ruin,” they said in the Frankfurter Allgemeine.

The citizens were not informed as the €440bn Stability fund was created. The opaque nature of the negotiations in Brussels left it unclear who was driving the policy, and for exactly what purpose. A SIV (structured investment vehicle) had been created in Luxembourg to raise money and operate the fund. “Yet when the Bundestag adopted this aid plan not a single member of parliament knew what they were voting for.”

“Chancellor Merkel obliged the President to sign this emergency law within hours. He was not able to examine its constitutionality, as he is sworn to do. No government should ever treat a head of state in this fashion, not least on a question of such existential importance.”

The group said the erosion of German state finances “strikes a blow at the constitutional foundations of our state and our society”. It runs contrary to the true spirit of Europe, with its diverse roots and cultures, and “trifles with the future of our children and grandchildren”.

“To fight this is not a return to outdated nationalism. As citizens we have a right to demand that our government abides by its sworn oath to protect the German nation against threats.”

They argue that the “pretended bailout” does nothing to reduce the debts of the countries receiving it. The whole game is designed for creditors. “The funds to Greece are clearly financial transfers since everybody knows that Greece cannot repay its debts.” By the IMF’s own sums, Greece’s public debt will rise from 120pc to 150pc by 2014. “This is economic madness,” said Prof Nölling.

Meanwhile Germany’s Centre for European Politics in Freiburg – a free-market think tank – has joined the fray with a report arguing that the use of €60bn of EU money under Article 122 of the Lisbon Treaty to support the rescue package is illegal. This is a new twist and on the face of it looks unanswerable. Here is the link for German speakers: http://www.cep.eu/startseite/

“It is a complete violation of our constitutional law and the judges at the court will have to say so if a case reaches them, even though they are afraid of the economic consequences,” said the author, Dr Thiemo Jeck.

The EU’s no-bailout clause from Article 125 says:

“The Union shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of any Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project. A Member State shall not be liable for or assume the commitments of central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of another Member State, without prejudice to mutual financial guarantees for the joint execution of a specific project.”

This does not necessarily prohibit EU states joining together voluntarily to rescue a country in trouble. However, it is another matter to use EU money itself for this purpose, even if it is possible where “a Member State is in difficulties or is seriously threatened with severe difficulties caused by exceptional occurrences beyond its control”.

Did Greece got into trouble for reasons “beyond its control”. Obviously not.

Bavarian politician Peter Gauweiler is reportedly planning to amend his separate case at the Verfassungsgericht to include these latest arguments.

I have no idea how the court will respond to all these cases, but those who assert confidently that the judges (usually split 4:4 on EU matters) will throw out the whole do not know either.

This is the court that sent tremors through the EU institutions with its ruling on the Lisbon Treaty in June 2009. The judges read the riot act to the European Court of Justice, a body that scandalously and repeatedly claimed that it has supreme jurisdiction over national law.

The ECJ has no such power. It falsely asserts this claim. The EU is a treaty organization of sovereign states. The states transpose EU rules (not laws) into their own national law.

The Verfassungsgericht stated that the sovereign states are “Masters of the Treaties” and not the other way round. They said national parliaments are the only legitimate fora of democracy, and that the European Parliament is inherently undemocratic. This is correct.

The court constructs a line of defence against any possible infringements of German sovereignty, stating that certain fields “must forever remain under German control” – including, of course, fiscal policy.

In a sense, the Verfassungsericht has become the defender of democratic freedom and liberties for the whole of the European Union since other national courts are largely craven (Though not Ireland’s supreme court) and since the Hegelian ECJ has demonstrated in a series of key cases that it has no respect whatsoever for human rights and acts a mere enforcer of authoritarian power-grabs by the EU’s executive machinery. As such, the ECJ is a dangerous organization.

My guess is that the Verfassungsgericht will spin out these cases for a while, hoping that the immediate crisis will pass. The crisis will not pass because EMU’s North-South split is inherent in the system and cannot be bridged.

At some point the court will find itself forced to rule. It may well deem elements of the rescue to package to be unconstitutional – though not all of it – and order Berlin to go back to the drawing board.

If that happens, you do not want to be left holding Club Med bonds or currencies (plural).

Tags: article 125, bail-out, bailouts, bank rescues, breach, bundestag,constitutional court, demoncracy, Dieter Spethmann, ecb, ECJ, European,european banks, European Central Bank, European Court of Justice,european monetary union, eurosceptic, eurozone, german professors,Germany, greece, hedge funds, Joachim Starbatty, Karl Albrecht Schachtschneider, lisbon treaty, no-bailout clause, portugal, putschist,spain, unconstitutional, Verfassungsgericht, Wilhelm Hankel, Wilhelm Nölling