A hearing at Germany’s version of the Supreme Court, to be held on July 10, could destroy all the optimism from the last EU summit.In the wake of the European summit last Friday, the German legislature finally approved the European Stability Mechanism—a permanent European bailout fund.
However, the Constitutional Court (in German, the Bundesverfassungsgericht) could now issue an injunction against the ESM if it finds that the mechanism impinges upon the sovereignty of the German state.
The plaintiffs, who oppose Germany transferring more power to European institutions, are trying to obtain a temporary injunction against the two laws to stop them entering into force until the court has addressed the main complaints against the measures at a later date and ruled whether the laws in question are constitutional. It is highly unusual for the court to hold a hearing on requests for a temporary injunction. The fact that it is doing so is regarded as a sign of the importance of the issue.
German President Joachim Gauck has already permitted the Court to investigate the matter, which led to a delay for the program by at least three weeks. Further delays could be longer, or could even complete overrule the legislation despite approval by the German legislature.
This is not the first time that the German Constitutional Court has threatened to smash plans for European institutions. Last fall, it examined the legality of the Greek bailout, ultimately upholding the measure.
At that time, it also argued that permanent bailout funds—like the European Stability Mechanism—might actually impinge upon German sovereignty because it is a permanent plan. The Financial Times’ Wolfgang Munchau argued that the decision “categorically rule[d] out any policy option beyond what has been agreed so far,” adding, “I cannot see how it can be consistent with the survival of the eurozone, given the policies of member states and the ECB.”
If the Court decides to impose an injunction, this will leave Europe (at least, for the moment) with far less funding to combat growing crisis issues and seriously delay any progress towards a comprehensive European banking union.
That said, the European Financial Stability Facility—the temporary European bailout fund—will still be in effect until next summer, so Europe’s funding power will not just vanish.
An injunction would allow the Court to debate the matter further. Should an injunction be imposed, this could either be a big deal or a complete non-event for markets.