In our previous article posted in May 2010 (see here), we initially reported about the challenge at the German Constitutional Court (Bundesverfassungsgericht) by a group of German professors and a prominent member of the Christian Social Union over the proposed financial rescue packages of the European Union and the International Monetary Fund, respectively, for Greece. Back then, in the interim proceedings, the Court rejected the complainants’ request for interim relief. Thus, for the time being until the main complaint is decided, the German government has been allowed to participate in the financial aid package for Greece. However, this interim decision has no legal consequences and no binding force on the actual judgment in the main proceedings.

The matter in dispute has recently been extended and thus, the German Constitutional Court now has to decide on the legality of Germany’s participation in the bailouts not only for Greece, but also for the Republic of Ireland and Portugal. The main question is whether the German government was right to agree to last year’s multibillion-euro bailouts for these struggling EU countries.

The German Constitutional Court commenced the first hearing on 5 July 2011. The complainants argue, in particular, as follows:

– The bailouts are contrary to the German Constitution’s protection of property (Article 14 of the German Constitution – Eigentumsgarantie) because it could endanger the stability of the German economy and generate inflation.

– The bailouts are a breach of the right to democratic representation (Articles 20, 28 of the German Constitution – Demokratieprinzip) by restricting the German Parliament’s control over its own budget. It is argued that the Parliament had to be consulted on the rescue packages.

The measures violate EU no-bailout provisions (Article 125 of the Lisbon Treaty), which say that neither the European Union nor the member states must assume each others’ debts without sufficient justification.

The Court made clear that basic economic and political issues will not be subject of the proceedings, but only the constitutional limitations of governmental decisions. A final decision is expected this autumn. Most observers await a “yes, but”-decision: The Court is expected to rule that the bailouts were legal. However, it might attach strings to the transactions and set conditions for future payments at the same time. Since the Court is known to strive to protect national sovereignty and limit the influence of the EU, it would be no surprise if the judges granted the German Parliament greater power in decision-making. In the unexpected event that the complainants succeed, German payments for the temporary rescue funds would be stopped. This could then also be a potential ground for repayment claims with respect to transactions which have already been made. In response to questioning regarding the challenge, a representative of the German Parliament emphasised the responsibility of the Court for the future of the European Monetary Union. There are no doubts that a successful complaint would have negative effects for the European Union financially, economically and politically and also serious consequences for the financial markets.

Dr Timo Bauer is a lawyer in the Public Infrastructure team in the Berlin office of Olswang.