Karlsruhe gives green light for German ESM ratification

On September 12, 2012, the German Constitutional Court dismissed several constitutional complaints that sought an injunction to prevent German ratification of the European Stability Mechanism (ESM) – a central pillar of the Eurozone’s crisis response – and the Fiscal Treaty in the preliminary phase of the proceedings (extracts in English). A full ruling is expected in a few months. German ratification is required for the ESM treaty to enter into force, and critical in financial terms for the ESM’s credibility. The Court’s preliminary ruling means that the last hurdle for the ESM to enter into force has now been cleared. German ratification should follow in the next few weeks.

The court conditioned German ratification on two reservations to the ESM treaty: first, the German capital subscription needs to be limited to 190 billion Euros, as provided by the ESM Treaty (though the ESM’s capital may be increased beyond this ceiling pursuant to the procedure forseen in Article 10 of the ESM Treaty); and second, notwithstanding the confidentiality of the ESM’s deliberations, the German Parliament needs to be fully informed about operations of the ESM.  The Bundesverfassungsgericht seized its one chance to foreclose two possible, but unlikely interpretations of the ESM Treaty that would conflict with the German Constitution before interpretative authority passes to the Court of Justice under the ESM Treaty.

The Court’s insistence on two reservations is only a small  “but”. The Court took issue with two aspects that are marginal to the firepower and effectiveness of the ESM. The decision has virtually no effect on how the ESM will operate, and in particular on the capital that the ESM will have its disposal. It could lengthen the German ratification process by a few weeks, but the Court’s decision has removed substantial  unertainty about the Eurozone crisis response. Most other Eurozone member countries, including France and Spain, have already ratified the treaty. According to Article 48 of the ESM Treaty, the Treaty enters into force once countries representing 90 percent of capital subscriptions have ratified. The German share in of the total capital subscriptions of 700 billion Euros is just over 27 percent.

When announcing the outcome of the proceedings, President Vosskuhle underscored that the task of the Court was to safeguard the German Constitution, even in times of crisis – but this was necessarily a limited task. It was the role of the executive and of parliament to to decide on appropriate policies. As the elected branches of government, it was their responsibility to decide on the best course of action in a situation characterised by considerable uncertainty, in which complex judgments were needed to decide what was in the best interest of a “unified Europe”. This reference to European unity may be an acknowledgment that the practical effects of the Court’s decision reach far beyond Germany, and concerned Europe as a whole.

The Court also noted with satisfaction that the German government sought to create a more rules-based system for financial assistance at the European level, and its attempts to ensure that all the decisions were taken on a more democratic basis. It seems to have left the door open for further integration, though limits are likely to result from its earlier decision on the Lisbon treaty and other limits may become clearer once the final judgment is available.  President Vosskuhle also mentioned that decision of the European Central Bank at the beginning of September to potentially purchase sovereign debt on the secondary market may be considered more fully in the final judgment.

And finally, as my earlier post on the ramifications of the Irish Pringle case predicted, the Court could not entirely ignore the invitation to enter into judicial dialogue with its fellow EU courts and the Court of Justice. This is a notable development, particularly given that the German Constitutional Court has never in its history submitted a request for a preliminary reference to the Court of Justice. President Vosskuhle expressly referred to the Pringle Case. However, as the complaints had only raised issues of German constitutional law, the Court did not need to assess the compatibility of the ESM Treaty with European Union law. As a result, the Court also deemed it unnecessary to wait for the Court of Justice’s decision on the preliminary reference in Pringle.

This may seem to be little more than a token acknowledgment to Europhiles critical of the outsize role in the construction of Europe played  by a particular national court, albeit a highly respected one. Yet it also demonstrates that the German constitutional Court, just like the German government and Parliament, is conscious that the legitimacy of some of its decisions is no longer assessed solely from a German perspective. Slowly but surely, the legitimacy of decisions affecting the Eurozone as a whole is now also evaluated from a European vantage point.

For international lawyers, the Court’s finding that the German Constitution requires two reservations to the ESM Treaty  is particularly interesting. The court leaves no doubt that interpretative declarations would be insufficient. But are reservations to the ESM Treaty permissible? The ESM Treaty itself is silent on this question.

A threshold question is whether EU law or international law applies to the question of whether the two reservations are admissible. The ESM Treaty, like the Schengen Agreement, is an intergovernmental treaty. Such agreements are not part of European Union law, even though Article 136 (3) TFEU enables the creation of the ESM and ensures its compatibility with EU law. Reservations to primary EU law are impermissible, though in practice negotiated protocols fulfil a similiar function. But such protocols require negotiations between the member states and they often take more time to negotiate than (unilateral) reservations. Tensions might also arise between the duty of loyal cooperation in Article 3 (4) TEU and such reservations. However, it is very unlikely that reservations to intergovernmental treaties such as the ESM Treaty are to judged on the basis of EU law. Rather, we need to look to international law, and Article 19-21 of the VCLT.

As the ESM Treaty is silent on reservations, the rule in Article 19 (c) VCLT applies. Are the two reservations “incompatible with the object and purpose of the treaty”? The answer is probably that neither the clarification that no further capital subscriptions beyond the 190 billion set out in Annex 2 may be required against German objections nor that the German Parliament must be briefed on the actions of the ESM is incompatible with the object and purpose of the treaty.

The next question is whether the other ESM member states could object to the German reservations on the basis of Article 20 (2) VCLT. The rule in Article 20 that objections are impermissible only applies to reservations expressly authorised by the treaty. By contrast, the ESM Treaty does not authorise any reservations. The question then is whether “it appears from the limited number of the negotiating States and the object and purpose of a treaty that the application of the treaty in its entirety between all the parties is an essential condition of the consent of each one to be bound by the treaty” under Article 20 (2) VCLT. The 17 Eurozone member states may be a “limited number”. However, it is unlikely that the application of the treaty as a whole is essential in view of its object and purpose.

Potentially also relevant is Article 20 (3) VCLT. Accordingly, acceptance of reservations is necessary in cases of constituent instruments of an international organization. The ESM Treaty might well be regarded as a constituent document of a regional international organization, in which case acceptance by the other member States would be needed. However, as a practical matter, this is unlikely to be a considerable obstacle, as other member states are almost certain to accept these two relatively minor reservations by Germany. The incentives for acceptance the reservations are high, especially for countries that are likely to borrow from the ESM in the near future. The alternative of negotiating a separate protocol would be deeply unattractive (it would likely take months to ratify, and prolong the uncertainty in financial markets).