I have read a few proposals for solutions to the European crisis. All have their problems.
- 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.
- 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.
- 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.
THE GERMAN CONSTITUTION AND THE EURO
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.
DEMOCRACY THE KEY TEST
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.