German President Frank-Walter Steinmeier (SPD) has decided to withhold his signature for the German law approving reform of the 500 billion euro “European Stability Mechanism” (ESM), which is the Eurozone’s bailout fund that has been issuing loans at low interest rates to Greece, Cyprus and Spain.
The law has been approved by both Germany’s Upper and Lower House, but is being challenged at the German Constitutional Court by seven MPs of the liberal FDP in a personal capacity. The FDP itself abstained during the vote.
One of the MPs is Frank Schäffler, who has also been writing about ESM reform on this website. He explains that the MPs are not fundamentally challenging the ESM but that the reform of the ESM is of “an overall constitution-changing nature” and therefore requires a two thirds majority in Parliament.
Bundespräsident Steinmeier unterzeichnet Gesetze zur ESM-Reform vorerst nicht. Diese Entscheidung ist richtig und folgt der bisherigen Staatspraxis bei Eilverfahren zwischen Bundesverfassungsgericht und Bundespräsidialamt.
— Frank Schäffler (@f_schaeffler) July 1, 2021
The reform is scheduled to enter into force from 2022 on and makes it easier for Eurozone member states to obtain ESM loans, as it eases the use of a “preventive” ESM credit line, for member states “that are not yet in a crisis”.
Notably, it also provides for the ESM to serve as a “backstop” for the EU’s “Single Resolution Fund“, another fund, financed by banks, meant to support bank restructuring. In effect, taxpayers would thereby be made liable for bank bailouts after all, despite initial promises that they would need to be protected. On its website, the ESM argues that an ESM bailout of banks would happen “without asking taxpayers to foot the bill” as the ESM loan would need to “be paid back within three to five years by bank levies and contributions collected from the banking sector”. Still, during the issuance of the ESM loan, taxpayers carry the risk.
To the backdrop of this is the high level of so-called “bad loans” in Southern European banking systems. In particular Germany and the Netherlands have long been pushing for a reduction of the number of these bad loans, and made this a condition for their approval of this reform to enable the ESM as the backstop for bank bailouts. This despite the fact that in February, the European Commission warned that “the volume of non-performing loans is expected to rise across the EU, although the timing and magnitude of this increase remains uncertain”, as it also pointed out that “the headline NPL (non-performing loan) ratios – based on a rather stable NPL stock and the increasing loan denominator – do not yet reflect the underlying deterioration in the credit profile of borrowers”.
The arguments of the plaintiffs
Enabling the ESM to help bail out banks permanently changes the risk structure of the ESM and significantly increases the likelihood of it being used, according to the seven FDP MPs. They warn:
“Even if the backstop for the bank resolution fund only comes at the end of the liability cascade, this point is quickly reached during a banking crisis.”
They further point out that the nominal cap for ESM loans to the SRF, which is set at 68 billion euro, is not credible, as it can always be increased with mutual agreement.
They also criticise that in the future, Eurozone member states will be able to receive money from the ESM without any reform conditions due to the changes to the system of precautionary credit lines. With regards to the latter, they also argue that this violates the principle that the ESM needs to be used as the “ultimate means”.
Writing on this website in March, FDP MP Frank Schäffler, who initiated the legal challenge, explained why he opposes ESM reform:
“Granting precautionary credit lines to governments contradicts the original principle that any aid would only be possible in return for reforms.
The second change – financially supporting the resolution of ailing banks -had been ruled out until now, because of the idea that if there had to be bailouts, it should be for member states, not for banks.
Now these red lines are being crossed.”
A procedural dispute between the German President and the German Parliament?
The German President has the right to examine laws and can ask the German government for explanation. The Constitutional complaint is combined with an application for a temporary injunction. When that is the case, it is, according to Frank Schäffler, in line with “previous State practice” for President Steinmeier not to sign yet. He has only used this right four times since he was sworn in four years ago, and every time he ultimately signed the law.
On twitter, German Professor in Public Law Franz Mayer argues that “the President may be violating the procedural rights of the Bundestag and the Bundesrat”, a dispute that would need to be sorted out “by the German Constitutional Court”, which he thinks is however “biased” in this case, something he argues “would need to be clarified by what the German law establishing the German Constitutional Court foresees” . He also makes the case that the procedure is for the German Constitutional Court to provisionally settle the matter with an interim order, “which is also what happened with [the new 800 billion euro EU recovery fund] NGEU”.
