If losses arise, they must be covered by the initial cash contribution of 80 billion euros (US$100 billion), which then would be topped up automatically by all participating countries according to their capital shares. If individual countries are no longer able to make the necessary contributions, others must do so on their behalf. In principle, a single country might have to assume the entire burden of losses. Such joint and several liability, the plaintiffs assert, contradicts the Court’s previous statements that Germany should not accept any financial commitments stemming from other states’ behavior.
Worse, according to the plaintiffs, although the liability of any country vis-a-vis external partners is limited to that country’s share of capital, this limitation does not apply to other signatory states. It is theoretically possible that a single country could be held liable for the ESM’s total exposure of 700 billion euros.
Finally, the ESM cannot be considered on its own, but must be seen in the context of the total exposure amount, which includes the 1.4 trillion euros in bailout funds that have already been granted. In particular, the Target2 credit drawn by the crisis-afflicted countries’ central banks, which already totals almost 1 trillion euros, should also be taken into consideration.
Nobody knows how the Constitutional Court will rule on these objections. Most observers believe that the Court is unlikely to oppose the ESM treaty, though many expect the judges to demand certain amendments, or to ask Germany’s president to make his signature subject to certain qualifications.
It is good that the Court’s decisions cannot be forecast, and even better that the Court cannot be lobbied or petitioned. The EU can be based only on the rule of law. If those in power can break its rules on a case-by-case basis, the EU will never develop into the stable construct that is a prerequisite for peace and prosperity.
Hans-Werner Sinn is a professor of economics and public finance at the University of Munich and president of the Ifo Institute.
Copyright: Project Syndicate