Judgement day looms for euro

FRANKFURT – When the history books come to be written about the euro, September 12, 2012 could well prove one of the most significant dates in the life of the embattled single currency.

At 10:00 am (0800 GMT) on that day, the eight scarlet-robed judges of Germany’s Verfassungsgericht or Constitutional Court will file into the courtroom in the southwest city of Karlsruhe to decide whether German President Joachim Gauck can sign into law the eurozone’s key crisis-fighting tools.

German parliament already voted in favour of the European Stability Mechanism (ESM) and the European fiscal pact with a two-thirds majority at the end of June.

But Gauck held off from completing the ratification process in face of a number of legal challenges filed by the far-left Die Linke party, a citizens’ initiative group called “more democracy” and a well-known eurosceptic from Chancellor Angela Merkel’s CSU Bavarian sister party, Peter Gauweiler.

They argued that the ESM – the EU’s permanent 500-billion-euro ($627-billion) rescue fund – and the fiscal pact were incompatible with Germany’s “Grundgesetz” or Basic Law because they are effectively forcing Germany to surrender its budgetary sovereignty without the necessary democratic backing.

By committing Europe’s biggest economy – and already its effective paymaster – to the ESM, parliament was essentially exposing Germany’s public finances to unlimited risks should one eurozone country after another topple under the debt crisis, they argued.

And that meant German voters’ basic democratic rights were being infringed upon.

In addition, the critics argued the ESM breaches the “no bailout clause” of the EU’s Maastricht Treaty, under which Germany agreed to relinquish its revered Deutschmark on condition there would be no direct or indirect sharing of eurozone members’ debt.

The ESM, which will replace the temporary European Financial Stability Facility, should have been up and running by July 1. But it needs Germany’s share of the rescue money to function and has thus been held up pending the Constitutional Court’s ruling.

On September 12 the court will not yet rule on the constitutionality of either the ESM or the fiscal pact.

It will simply decide whether to grant temporary injunctions sought by the plaintiffs that will prevent President Gauck from signing the legislation into law until a final ruling can be made next year.

If the court dismisses the plaintiffs’ case, everything will be hunky dory: Gauck can sign the legislation and the ESM can at long last become operational, much to the relief of the financial markets.

But if it grants the injunctions, it could trigger fresh financial turmoil as markets will take this as a sign the court believes that the ESM and the fiscal pact are incompatible with Germany’s constitution, effectively killing off the ESM at birth.

Expectations ahead of the ruling are correspondingly at fever pitch, with doomsday scenarios doing the rounds that the euro may immediately break up.

But analysts are not quite so alarmist.

“A failure to ratify the treaty would probably not result in an immediate break-up of the single currency,” said Marie Diron, senior economic adviser at Ernst & Young Eurozone Forecast.

“But it would raise volatility in financial markets and reverse the recent period of calm that has helped confidence slowly return to the eurozone. We could be back to the darkest periods of extreme volatility and investors’ risk aversion which would have a significant negative impact on the outlook for the eurozone,” she said.

Analysts at Morgan Stanley, too, who see a 40-percent chance that the court will not give its green light at least just yet, warned that a hold-up “will likely have major repercussions for financial markets.”

The court was already assured by experts back in July that a delay would not cause major problems because the ESM’s predecessor, the temporary EFSF, is still in place.

But it could put a question mark over rescue money for Spanish banks, noted Diron at Ernst & Young.

Looking ahead to the final ruling, which is not expected until 2013, the court’s judgement will be crucial as to how quick and effective the eurozone’s crisis tools are, according to diplomatic circles in Paris.

“The risk isn’t that the court will reject” the ESM. “But that it’ll further extend parliamentary control, which will render things very difficult to operate,” the sources said.

Mattias Kumm, a law professor at Berlin’s Humboldt University and a constitutional expert, saw a 25-30 percent chance that the court will rule the ESM is unconstitutional.

And that, in turn, could lead politicians to decide to change Germany’s constitution, which would require a referendum, Kumm argued.