German Federal-Constitutional Court (BVerfG) Rolls the Dice on Wednesday

An upcoming German court decision will shape Europe’s future. The Wall Street Journal explains…

‘The Karlsruhe-based constitutional court, Germany’s equivalent of the U.S. Supreme Court, warned in a landmark 2009 ruling that it can strike down the actions of European Union institutions if they violate the German constitution…The court’s [upcoming] judgment, highly anticipated in European capitals and financial markets, will settle whether Chancellor Angela Merkel’s government breached the German people’s property rights in agreeing to the initial bailout of Greece in 2010.’

In other words, Wednesday could be the day Germany tells the likes of Greece, Ireland, Portugal and Spain to go kiss a Vierwaldstätterseedampfschiffgesellschaftskapitaenzmuetzensternlein (officially the longest German word). And if the Germans do in fact tell the PIGS to kiss their Vierwaldstätterseedampfschiffgesellschaftskapitaenzmuetzensternleins, that could spell the insolvency of those countries’ governments and thereby the insolvency of Europe’s banks.

Here is what you need to know about Europe’s big day. A 2006 study conducted by the Deutsche Forschungsgemeinschaft discovered what you and I already know. Judges are significantly influenced by completely irrelevant factors when they make their rulings.

The study asked German judges to roll dice before handing out sentences. Believe it or not, those that rolled a high number gave a 50% higher sentence. And these were German judges.

The Bundesverfassungsgericht (BVerfG), known to non-German speakers as the German Federal-Constitutional Court, will on Wednesday rule on the legality of Europe’s ongoing bailouts. Will it be rolling the dice? Or will the stock market influence it instead?

The plaintiffs’ argument is twofold. Firstly that the bailout arrangements violate property rights and secondly violate parliamentary transparency requirements. The German Greens have also filed a case on the lack of transparency, because the parliament has not been kept adequately informed.

The basis of the claim that the bailouts violate German property rights is that German taxes are being spent abroad. How much? More than half of the German Federal budget so far this year, according to Spiegel. This is several magnitudes larger than World War 1 reparations. Imagine having half of Australia’s Federal Government budget going to bailouts for New Zealand!

But the issue isn’t political or economic. It’s whether the various treaties that govern Europe allow this kind of transfer. The court is also expected to rule on the legality of European Central Bank bond purchases and whether jointly backed ‘Eurobonds’ can be created.

The consensus is that the court will make any further bailouts subject to approval by the German parliament, but will not interfere with what has happened so far. Water under the bridge and all that. Imagine trying to reverse bailouts!

The idea here is that German politicians are under so much pressure not to continue the bailouts, that making bailouts subject to parliamentary approval may be as good as banning them.

The core issue is that the German executive (the Chancellor and her cabinet) has made decisions regarding Europe, rather than the German parliament. Illustrating this was finance minister Wolfgang Schäuble’s request for ‘Bevollmächtigung’ regarding EU member state bailouts. This is like granting Bob Brown ‘absolute power’ over heritage listing.

It might seem odd that eight dice-throwing, wig-wearing judges can rule on the legal validity of Europe’s efforts to save itself from fiscal disasters. But this jurisdiction issue was settled in 2009 – by the same eight dice-throwing, wig wearers. They then declared their ability to do so.

Of course, the court really derives its power by being able to prohibit Germany from participating in bailouts. Without German compliance and capital, there isn’t likely to be a meaningful bailout anyway.

So who is causing all this trouble by bringing it to court? A motley crew of Euro-sceptic politicians and academics who brought much the same case against the Euro in 1998. Back then it was all theoretical. Now they are back with a vengeance. And vindication, they argue.

The plaintiffs aren’t kidding themselves though. If the judges ruled in their favour, invalidating all bailouts so far, that would make them ‘heroes’ according to one plaintiff. It would probably also bring down Europe and its financial system.

Their expectation is that the BVerfG will simply outline the limits of German Federal sovereignty versus European responsibilities. In other words, it will draw a line in the sand for Germany’s responsibilities to Europe. It will be a very vague line drawn in shifting sands though. Perhaps the most interesting ruling that is likely to emerge is an ‘absolute limit’ for German aid to other nations, as hinted by the Court’s President.

Whatever the Court rules on Wednesday will determine the parameters of future bailouts, if indeed there are any. This is a factor of Germany’s weight in the Eurozone. And it’s interesting because the Court will rule based on principles and treaties that are difficult to disagree with.

In the case of the treaties, countries agreed to them. They are bound by them and disagreeing with a legal ruling on them is pointless. On principles, national sovereignty is as hot a political issue in Greece as it is in Germany. The Greeks cannot expect Germans to give up theirs while the Greeks continue to rebuff imposed austerity measures. With any luck, Europe will make it to Wednesday so we can find out what number the Court rolls up when it takes the dice in its hands.

Nickolai Hubble
for Markets and Money

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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2 Comments on "German Federal-Constitutional Court (BVerfG) Rolls the Dice on Wednesday"

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Hi to all at the DR. I am no big time investor, and never will be. I am addicted to your articles though. Been a subscriber for e letters for a number of years now. I love the writing style, and especially your common sense attacks on what is disrupting and failing ‘The’ common sense.

Thank you so much for coming out from the table, and cheering up another one of you aspiring readers.

Thank you.

To Your Health and fortune.

Kindest regards.


Update to Nick’s report. The Supreme court judges (resplendant in their odd red outfits) I believe decided that the existing bailout was legally agreed to by the German Government as the mechanisms of state permit it. (Rather a pragmatic decision considering it cannot be undone). They did however also draw attention to the fact that legally the Parliament and not the Cabinet must decide on any future contributions to bailout funds. Here appears to be the writing on the wall for the Euro. The German people do not want the responsibility for their southern cousins debts. Neither do they want… Read more »
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