Like the bomb in Munich , an unexpected decision by the German Constitution Court will blast the financial sphere....

http://www.zerohedge.com/news/dont-count-your-hahnchen-40-chance-german-court-does-not-ratify-esm

"Don't Count Your Hahnchen": 40% Chance German Court Does Not Ratify ESM

Submitted by Tyler Durden on 08/30/2012 14:51 -0400

• Bond
 
• Germany
 
• Italy
 
• Morgan Stanley

"Don't underestimate how close the Court verdict is" is the warning that Morgan Stanley's European Research group sends out in a note today. In their view, there is a non-negligible risk that the German Constitutional Court will voice concerns about the ESM and, potentially, also the fiscal compact on September 12. Given that the EFSF is still in operation, given that the Court views the scope of the German constitution as being exploited already, and given its record of voicing concerns about European integration, MS sees a 40% chance that the Court bans Germany from ratifying the ESM treaty (with major repercussions for financial markets), at least for now, and while their base case is for ratification of both treaties, they believe the market is not priced appropriately for the downside tail-risk of a possible 'no' verdict (and the asymmetric scenarios below).

Morgan Stanley: Concerns about the German Constitutional Court?

Hoping for a go ahead for the ESM on September 12

 When Germany’s Constitutional Court announces its initial verdict on several emergency injunctions regarding the ESM and the fiscal compact, the decision will be significant in two respects:

• First, the ruling could decide the fate of both treaties if the Court decides to grant the emergency injunctions and bans Germany from completing the ratification process until it has ruled. This is especially true for the ESM, which contrary to the fiscal compact cannot start without Germany’s participation.
  Second, the verdict – either now or in the final ruling expected early next year – might set out additional boundaries for the German government when it comes to European policy initiatives.

Should the Court decide not to grant an emergency injunction, its president could sign both treaties into law, completing the German ratification process. Once Germany has deposited what are called ‘instruments of ratification’ in Brussels, it will be bound by the treaties under international law. Given the binding nature of the ratification, we expect the Court to weigh its decision very carefully and would assign a probability of up to 40% on the Court granting an emergency injunction against the ESM, forcing the government to hold off until the Court has given its final verdict sometime next year.

If the Court bans the German government from joining the ESM for now, this will likely have major repercussions for financial markets.

At the public hearing the Court held in July, the judges were probing several of the experts on the likely consequences of a delay in the ESM. By and large, the judges were assured, e.g., by Bundesbank President Weidmann and by representatives of the EFSF, that a delay would not cause major problems as EFSF support was still available. While this is certainly true, it seems to us that policy-makers, notably in Germany and Spain, favor bringing new support programs, especially if they concern sovereign support for Spain or even Italy under the ESM instead of the EFSF. As such, the decision of the Constitutional Court could therefore also affect the start of the new ECB’s bond buying program.

Constitutional Court watches over whether democratic decision-making is undermined by European integration. The Constitutional Court consists of two so-called Senates, which have eight judges each. The current President of the Court, Prof. Dr. Andreas Voßkuhle is also the chairman of the second Senate, which is in charge of the ESM and Fiscal Compact ruling. Each Senate is led by a chairman, which are usually the President and Vice-President of the Court. Decisions that involve basic rights or issues of particular importance are decided with a two-thirds majority. All other issues require an absolute majority. In an interview with the German daily F.A.Z., Judge Voßkuhle stressed that the parameters of Germany’s constitution, the ‘basic law’ (Grundgesetz), were close to being exhausted when it comes to further European integration.

Constitutional Court decision closer than many think

Overall, the decision is likely to be a close one. For starters, theCourt has already signaled that it takes the issues very seriously by granting a public hearing on the matter (which is unusual for a decision on an emergency injunction). In particular, the Court already warned the government, in its verdict on the involvement of the Bundestag on EFSF matters, to not bend the rules of the constitution.

What the Court decides about on September 12

On September 12, the Court will only decide on the requests for so-called interim relief, i.e., an emergency injunction which puts the German ratification process on hold until the Court has decided on the cases in full. Such a final verdict is not expected before 2013. But the Court has chosen an unusual procedure, which makes it unlikely that the final verdict will deviate from its preliminary assessment in September.

Usually, the Court assesses a request for interim relief in two steps:

1. The Court first looks at the validity of the complaint without ruling on the matter itself. Here the request for interim relief needs to be admissible on the basis of an immediate and direct danger to the constitutional rights of the claimant in question. This danger needs to outweigh the consequences of the delay of the government decision in dispute.
2. In a second step – and provided the case itself is admissible – the Court would then decide on the constitutionality of the issue at a later stage, i.e., the Court needs to assess whether the complaint is justified on the grounds of the German Constitution, notably whether the sovereign rights of the German people are being infringed. For cases brought by individuals, the hurdle of admissibility is high, with the Court throwing out more than 97% of the cases.

...

In the present case, however, the Court has purposefully taken its time with its preliminary assessment of the emergency injunction, perhaps longer than expected by some. The Court is seemingly fully aware of the fact that if it would reject the request for interim relief, and hence would grant Germany permission to ratify the treaties (which would then become binding in international law), this would make it difficult to rule the treaties unconstitutional at a later stage.

****

http://www.bruegel.org/nc/blog/detail/article/872-is-germany-heading-towards-a-referendum/

Is Germany heading towards a referendum?

By Philine Schuseil on 24th August 2012

The question of the compatibility of the German constitution (officially known as the Basic Law), with further European integration is at the origin of current debates in Germany. The Federal Constitutional Court (FCC) will decide in September on whether the European Stability Mechanism (ESM) exceeds the limits of the Basic Law. Meanwhile, a debate on holding a referendum in Germany on the future of the EU and new EU treaties emerges. This column summarizes the discussion.

First, there is a debate about the constitutionality of the ESM. The FCC will decide on 12 September 2012 on whether the ESM may exceed the limits of the Basic Law. This is notably due to the organisational structure of the ESM: its Board of Governors comprised of the euro area’s finance ministers would take all major decisions (except of changing the authorised capital stock of the ESM according to Article 10 ESM treaty). In urgent cases, according to Article 4 (4) ESM treaty, decisions can be taken using an emergency voting procedure that requires a qualified majority representing 85% of the ESM’s capital shares (instead of an unanimous vote of the members participating in the vote). The Board’s decisions would have an impact on the German budget, which could subsequently undermine sovereign rights of the Bundestag. German law professor Franz Mayer explains that “in the context of democracy, it is in particular the budgetary rights of the German parliament that they consider to be infringed upon. […]The mere size of the entire endeavour is endangering the leeway of the German parliaments and its budgetary freedom.”

German Law Professor Stefan Homburg, who advises the plaintiffs against the ESM, writes in the FAZ on constitutional doubts regarding the ESM treaty. According to his analysis, Articles 34 and 35 ESM treaty about professional secrecy and immunities of persons risk to remove democratic accountability from the governors. Thus, in conjunction with Article 32 ESM treaty that prevents control by inter alia (Article 32 (5)) declaring “the archives of the ESM and all documents belonging to the ESM or held by it” inviolable, Homburg sees very significant risks undermining basic democratic structures.

Decisions of the ESM Board could only be democratically legitimated if they would need the approval of national parliaments. The German law accompanying the ESM treaty, the “ESM-Finanzierungsgesetz”, aims at ensuring the democratic basis by obliging German members of the Board to refuse decisions with impact on the German budget and that have not been accredited by the Bundestag. However, according to Professor Dietrich Murswiek, this is legally not enforceable. 

Such a judgment of the FCC could necessitate a constitutional change, either by referendum or by Article 23 Basic Law in conjunction with Article 79 (2) and (3) Basic Law.
The possibility of holding a referendum is explicitly foreseen for the reorganisation of federal territory (e.g. the referendum to merge Berlin and Brandenburg proposed in 1995) or for a replacement of the Basic Law. The second case is regulated by Article 146 GG, which stipulates that the current Basic Law “shall cease to apply on the day on which a Basic Law freely adopted by the German people takes effect.”

A second debate goes beyond the constitutionality of the ESM and focuses on general limits of the Basic Law in the context of further European integration.  Article 110 Basic Law generally states that all revenues and expenditures must be included in the national budget. However, Article 23 Basic Law implies the possibility of transferring sovereign rights to EU level provided that the Federal government enacts a law. For such a law, Article 23 Basic Law refers to Article 79 (2) and (3) Basic Law, which require that this law must be approved with majority of 2/3 of all votes in both Bundestag and Bundesrat.

The debate did not emerge recently. In September 2011, Andreas Voßkuhle, President of the FCC, told the FAZthat there was not a lot of margin left in the Basic Law to transfer sovereign rights to the EU. Only a new Basic Law voted by referendum could render further integration possible.  
In July 2012, Federal Minister of Finance, Wolfgang Schäuble, according to the FAZ, says that given the necessary further political European integration a new Basic Law may already be voted by referendum in a few years. Minister of Labour and Social Affairs Ursula von der Leyen, on the other hand, argues against proposals for a referendum on the Basic Law and further European integration. The Basic Law would not become obsolete in the context of further integration. There “is still a lot of margin.”

The Bavarian Minister-President Horst Seehofer wants an amendment of the Basic Law to include referendums. He told the Welt that for further integration the people must be consulted in three areas: the transfer of rights to Brussels, the adhesion of further countries to the EU and the decision on German financial aid to other EU states including debt mutualisation. “We should include such forms of plebiscites in the Basic Law; we need to involve more people”. Europe cannot remain a project of the elite. “We can overcome the crisis of legitimacy and trust towards the European institutions only with more transparency and citizen participation.” 

The third debate goes beyond the ESM and limits of the Basic law by calling for new EU treaties with much more transfer of sovereign rights to the EU. Habermas et al. denounce a democratic deficit in the current EU landscape.  They are in favour of holding a referendum in Germany in the context of new EU treaties.

“As the representative of the biggest donor country in the European Council, the Federal Republic should take the initiative and table a resolution for summoning a constitutional convention. […]It is not out of the question that the Federal Constitutional Court will seize the initiative from the political parties and announce a plebiscite to amend the constitution. […] A joint initiative backed by the SPD, CDU and Greens to set up a constitutional convention, the results of which could be voted on at the same time as the plebiscite on the constitution (but not before the end of the next parliamentary term), would not then be an unrealistic prospect. This would be the first time that Germany has conducted a public debate of this kind, in which opinions are formed and decisions taken about the different political options for Europe’s future: […]”

Their paper has been published on the official SPD website. According to the Welt, the authors formulated the paper for the discussion about the SPD electoral platform programme for 2013 and SPD leader Sigmar Gabriel,according to euractiv, declared the propositions made there to be part of the official debate on the 2013 SPD programme. The two other SPD candidates for the chancellery, Peer Steinbrück and Peter Steinmeier, are welcoming the proposals made in the paper. It seems that this disappointed the clientele of Steinbrück, as pointed out  in the Handelsblatt as there are already “enough debt politicians”.

In the meantime, a more intense debate about holding a referendum in Germany on the EU emerged. According to the Spiegel, Gabriel, proposes a constitutional change with a subsequent referendum on debt mutualisation with a common budgetary control.
Federal Minister of Justice, Sabine Leutheusser-Schnarrenberger of the Liberal Party (FDP) argues for a European constitution that re-enforces the role of the European Parliament as well as that of each EU citizen. However, she is reluctant regarding referendums: economic issues such as the fiscal pact would not be suited for referendums.
Former Federal Minister of Economy, Rainer Brüderle, said in an interview to the Hamburger Abendblatt that “We might get to a point where a referendum on Europe is necessary. We Liberals have always been for a European Constitution. The further development of the debt crisis will show how much sovereignty EU countries must transfer to EU level.” , and also Guido Westerwelle, German Minister of Foreign Affairs, is in favour of a referendum on the future design of the EU. He told the Bild am Sonntag that he hopes to have one day a “real” European constitution, based on a referendum.

Many columns and points of view point out the dangers of such a referendum, for example the Tagesspiegel, theHamburger Abendblatt or the Frankfurter Rundschau writing that a referendum can be a “wonderful thing” for democratic self-assurance in quiet times, but that, in the midst of the crisis, this would be the wrong remedy. The Spiegel writes about the possible different possibilities of implementing a referendum in Germany. However, Jens Petermann, Pasquale Pasquino and Christoph Hönnige write on the European  that a ratification of the ESM under the Basic Law is not possible and that only the consent of the constituent power, namely the people, could change it. They say that the aim of the constitutional complaint should be to bring about a constitutional change by referendum and that a decision of the Court would be the only way to lead to it.