Wednesday, August 29, 2012

Will a new German constitution save the euro?

If the Social Democrats win next year’s general election in Germany, they will ask voters to adopt a new constitution in a referendum. The new document, so they plan, would remove the legal fetters that currently prevent Chancellor Angela Merkel agreeing to eurobonds or joint deposit guarantees. Not only the Social Democratic Party (SPD), also politicians from Merkel’s ruling coalition are now speaking out in favour of a referendum. Some analysts are rejoicing that Berlin is finally preparing the ground for the fiscal union that will save the euro. But this is Germany, where policymaking is complex and slow. The debate about a new constitution might sap political energies without contributing much to the stability of the single currency.

German politicians mean different things when they talk about a euro-related referendum. Sigmar Gabriel and his fellow leaders of the SPD say they want voters’ consent to a eurozone fiscal union that involves not only debt mutualisation but also joint budget-planning, harmonised tax rates and tough financial regulation. Some pro-European MPs in Merkel’s own Christian Democratic Union (CDU) agree on the need for a new constitution. But many others insist that the current document leaves enough leeway for euro rescue measures. Some CDU politicians use talk about a referendum mainly as a warning shot to the constitutional court: if you judges continue constraining Merkel’s euro policies, a new constitution will restore power to elected politicians. Finance Minister Wolfgang Schäuble predicts that a constitutional referendum will happen “quicker than I would have expected a couple of months ago”. But he does not say what it would entail.

Horst Seehofer, leader of the traditionally euro-wary Christian Social Union (CSU), the CDU’s smaller Bavarian sister party, wants a referendum each time the EU assumes new powers, bails out a struggling member or admits new countries. And he probably hopes voters will say no to these. Foreign Minister Guido Westerwelle from the Free Democratic Party (FDP, another coalition member), contemplates not a German but a Europe-wide referendum on euro rescue measures. All parties are spooked by the recent successes of the Pirate party which campaigns for more country-wide referendums.

Even if Germany’s politicians could agree on a referendum strategy, this would not be a quick fix to save the euro.

Germans are having this debate right now because the constitutional court has indicated that EU integration could not go much further on the basis of the current constitution. Stricter budgetary oversight from Brussels, as envisaged by the fiscal compact, could be problematic. Eurobonds or any other kind of unlimited liability involved in a fiscal or banking union would be incompatible with the constitution. These would undermine Germany’s statehood and democracy by constraining parliament. If politicians cannot promise different fiscal policies, voters are deprived of a real choice and democracy suffers.

These constraints cannot be removed easily because the German constitution contains an ‘eternity clause’ (Article 79) that sets in stone certain principles, notably democracy, federalism and the market economy. No parliamentary majority and no referendum can alter these principles. Hence, the only way for Germany to accede to a fiscal union is to convene a constitutional assembly, work out a new constitution and put it to a referendum.

Some lawyers say this could be done quickly: only the eternity clause and the one detailing how Germany transfers powers to international organisations (Article 23) need to be tweaked. But more likely the constitutional assembly would be inundated with calls for more extensive social rights, a reform of federalism and a new voting system, to name but a few. “This would be an extremely long process”, predicts a constitutional expert.

Nor is it assured that Germans would vote yes in the ensuing referendum. Eurosceptics will argue that the new constitution will lead Germany into the dreaded transfer union, characterised by permanent money flows from Germany to the eurozone’s South. And even if a new constitution was adopted, who says there would be a political majority for eurobonds? Most Germans are against debt mutualisation even if it comes with tough budgetary oversight, according to a recent Emnid poll. Even among SPD voters, less than 40 per cent are in favour. “It’s not that if we had a new constitutional clause we would just wave through debt mutualisation”, says one CDU advisor.

And there is a last hurdle: Germany might adopt a plan for fiscal union only to be blocked by Austria, Finland or the Netherlands. After all, this is not really a debate about the German constitution but the future shape of Europe.

Nevertheless, the constitutional debate will continue because it suits both the opposition and the government. The SPD seeks to sharpen its political profile ahead of the 2013 election. It has so far loyally supported Merkel’s euro policies in parliament. Now many voters complain that they no longer know what the SDP stands for. The SDP is trying to change that, not by blocking Merkel’s policies but by going beyond them.

The CDU also gains from the constitutional debate. The opposition accuses Merkel of lacking a blueprint for the euro, of reacting to market panics, and of recklessly putting taxpayers’ money at risk without delivering more European integration. By talking about a new pro-European constitution, the government looks like it has a plan while it can put off hard decisions until after the 2013 election.

Now all eyes are on the constitutional court again. On September 12th the judges will issue a preliminary verdict on the European Stability Mechanism and the fiscal compact. They are unlikely to strike them down. But they will define conditions for making the ESM and the compact compatible with the constitution.

Some constitutional experts expect that the court will use the occasion to pronounce on what a process of constitutional renewal might look like. Others think that the court will shy away from encouraging such a process and instead widen the government’s room for manoeuvre within the current basic law.

Whatever the court does, the debate about a new, pro-European constitution will hot up this autumn. But do not be fooled: Germany is still a very long way from agreeing to eurobonds.

 Katinka Barysch is deputy director of the Centre for European Reform.

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