I have read a few proposals for solutions to the European crisis. All have their problems.

  1. Expand the EFSF. But as John Plender points out in the FT today, that would raise questions about Italy’s fiscal position, as it is a guarantor of the EFSF. The EFSF is a distraction when it comes to thinking clearly about the problem — it is member states that have the resources on which it depends, and the only member state in a real position of strength is Germany.
  2. Use the EFSF to buy PIIGS bonds and burn speculators. But i) there is more to this problem than speculators — investors are likely selling, and ii) unlike the TARP, the EFSF is restricted to making loans. It says in the framework agreement that “A Guarantor shall only be required to issue a Guarantee in accordance with this Agreement if: (a) it is issued in respect of Funding Instruments issued or entered into under an EFSF Programme or on a stand-alone basis and such Funding Instruments finance the making of Loan(s) approved in accordance with the terms of this Agreement and the Articles of Association of EFSF or it is issued for such other closely-linked purpose as are approved under Article 2(3)….” So any move like this would require another round of EU negotiations.
  3. Joint bond issuance. But can the Germans do this? Is it not barred by the constitution? I have tried to investigate this but it is a morass of legalese. 
Update: On 3, here is something from the Centre for European Studies. The relevant press release from the German Constitutional Court is here. It looks like the question is fuzzy, but the German government will be reluctant to go too far.


There is one matter affecting the  euro, and the solidity of the European economy  generally, on which  foresight is now needed. That is a decision the German Constitutional Court might take on whether the proposed  closer fiscal policy integration in the euro  zone is compatible   with the German  Basic Law or  constitution.  For understandable historical reasons, German Courts take democratic norms and the sovereignty of the people very seriously.

Issues that may be at stake before the German Constitutional Court  are  whether

1.       The increased EU surveillance of the German budget, or

2.       The large new German contribution to the  special vehicle being set up to  help  euro member states with  funding difficulties,

  run  afoul of the German  constitution or Basic Law. It is important for  markets ,and for the economic stability of Europe  and the world ,that  the EU not be taken by surprise by any decision the German Court may take on these vital matters that are now underpinning the euro.

The Court   has already addressed this sort of issue in 2009, in its judgement on the Lisbon Treaty. So we have a  preview of its thinking.  It  emphasised its belief that   the sovereign   state is still the main vehicle presently available for  democratic governance.


It said then that

             “an increase in integration(in the  EU) can  be unconstitutional (in Germany)l if the level of democratic legitimation (in the EU) is not  commensurate to the extent and weight of the supranational power or rule”  at  EU level

And it has  added that, for it, the  test of democratic legitimation is whether “the allocation of the highest ranking political offices”takes place  by means of  “competition of  Government and opposition” in   a free and equal election . Essentially the question it posed was ..can the people vote the EU  government out of office?  Even though the European Parliament is directly elected, it  not believe that the  EU yet passed that  democratic test. And they are right, the people of the  EU  do not have an opportunity to vote the  EU  government out of office.

The Court was  therefore very reluctant  to agree to further  EU integration, beyond that proposed in the Lisbon Treaty, without a qualitative improvement in  democratic  governance at  EU level. Otherwise it  favoured keeping power at the  level of the states because it  argued that the states of the EU have a more developed democratic  practice than the EU does ,at the moment.