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Berlin Fears a High Court Ruling Could Threaten the European Union
By: Marc Lanthemann, Stratfor.comApril 15, 2014

The Greek economy ended its four-year exile from international markets last week with a triumphant 3 billion euro (about $4.1 billion) bond sale. The global financial media trumpeted this somewhat unexpected achievement as a sign that things were finally turning around in the European Union's most blighted country. Media reports to the contrary, Greece's return to the market does nothing to resolve Greece's systemic economic deficiencies. Instead, it enables Greece to build up more debt, which will leave it a permanent bailout state for the foreseeable future.

In any case, events in Athens, a city perennially destined to be a dependent on the great powers of any given time, will not be pivotal to the future of the European Union. Nor will decisions made in Spain, Italy or even France. Instead, the Continent's fate in the 21st century will be decided in Germany.Germany stands increasingly alone as the guardian of the very European order that allowed it to prosper and quelled its historical insecurities about its neighbors.

Something as seemingly banal as a conversation at an Italian restaurant in Berlin does a much better job of illustrating how far Europe actually is from recovery, and how the fate of the Continent lies in Germany's hands. In the first days of April, German Interior Minister Thomas de Maiziere met with a group of scholars of constitutional law for dinner and discussion of the options for limiting the reach of Germany's powerful Federal Constitutional Court. The meeting stands testament to the German fear of seeing the European order crumble and to the severity of the political crisis brewing under the surface in the Continent.

The Perils of Unemployment

Stratfor has warned for years that the economic downturn that began battering Europe in 2008 would evolve into a full-blown social and political crisis. Nearly six years have gone by, and the European system remains as dysfunctional today as it was then. Great Depression-levels of unemployment have become the norm in Southern Europe, and have begun to creep northward.

Growing numbers of the unemployed and underemployed are fertile ground for political radicalism. Now, hopelessness about the future of Europe is moving into the mainstream. In election after election from France to Hungary, nationalist and Euroskeptic parties continue to gain in popularity to the point that they are becoming entrenched parts of the political system.

They remain a minority, for now. But many of them, in particular the National Front in France, have had to moderate some of the more radical parts of their platforms to break into the political mainstream. As popular discontent against what is seen as the failures of the pro-European mainstream parties grows alongside the economic crisis, so does support for some of the more nationalistic policies espoused by the far right.

The modern European establishment has only recently begun acknowledging the threat of radical parties. Next month's EU parliamentary elections have amplified the establishment's concerns. National elites have a tendency to deride what they perceive as loud and unrefined fringe groups, and to show considerable surprise when they become a political mainstay.

More aggressive commentators have denounced the European leadership for allocating inordinate resources to stabilizing the Continent's financial sector while pursuing tepid policies to stem the unemployment crisis. But while unemployment is ultimately a much more dangerous risk factor for the medium- to long-term stability of Europe, it is also a more difficult problem to solve.

Unemployment is a deeply political issue, much more so than a bank's balance sheet. It intersects not only with issues of economics, but also with myriad others including social welfare and sovereignty. While it is generally agreed that a growing economy leads to lower unemployment, the mechanics of job creation are not as clear-cut as those governing sovereign debt risk.

A sea change on how European elites, and Germany in particular, view the crisis now appears to lie ahead. The strategic threat posed by unemployment-fueled nationalism has become a core preoccupation in both Berlin and Brussels. It is becoming clearer that while current stopgap measures, including European Central Bank President Mario Draghi's famous open-ended bailout guarantee, may have warded off a fatal shock to Europe's economy, they are doing little to revive it.

Actually reviving it would require particularly bold action from the European leadership. Once-taboo topics such as giving the European Central Bank the ability to pursue monetary financing or mutualizing the debt of eurozone members are now openly discussed at the highest levels of European government.

The thinking has also changed within the German leadership, for whom austerity used to be a quasi-religious mantra and fears of inflation bordered on irrational. Now, even some of the most hawkish representatives of the German Central Bank are making cautious overtures regarding an expansionary monetary policy, especially as the European Union, including Germany, veers toward deflation.

The Limits of the European Central Bank

Calls for the European Central Bank to replicate the policies of its overseas counterparts have grown louder. These often overlook the fact that unlike the Federal Reserve and the Bank of England, which have guaranteeing employment as a charter goal, the sole mandate of the European Central Bank is to ensure price stability, much like the German Central Bank on which it was modeled. Even then, the bank is remarkably constrained. For example, it cannot directly purchase government bonds. These legal constraints can be changed, but only through a difficult political process.

With interest rates at 0.25 percent and data unclear as to the effectiveness of negative interest rates, quantitative easing is becoming increasingly popular, even within the European Central Bank. It is one of the few powerful tools the European leadership has left to kick-start the Continent's moribund economy. It also happens to be the only one that has at least a veneer of legality. Even then, it is hard to conceive of a meaningful program on par with the United States' three rounds of quantitative easing that could be easily contained within the bounds of the European Central Banks's inflation control-only mandate.

Herein lies the root of the problem, which is that all the measures that might reboot the European economy in essence require sacrificing more sovereignty to a central European authority. Even at this hour, when consensus is slowly but surely building on the political side for more drastic action, the European Union's perennial mandate problem is derailing any hope of recovery.

So far, the European leadership (including the courts) has shown itself to be remarkably creative in finding loopholes and drafting tack-on amendments to sidestep some of the most cumbersome EU legislation and get the job done. Unfortunately, there is no easy answer when it comes to nations having to surrender sovereignty, whether economic, political or social, to a group of barely accountable European technocrats.

The debate surrounding the role of the German Federal Constitutional Court comes against this backdrop. The court, a revered institution in Germany, is spearheading the defense of national interests against perceptions of EU overreach into sovereign matters.

A Threat From the Constitutional Court

Much like the U.S. Supreme Court, upon which Germany's highest court was partially modeled after World War II, the German Federal Constitutional Court is the final interpreter of constitutional law. Accordingly, it has the last word on the legality of any treaties, agreements or actions undertaken by Germany at the European level.

The court already has challenged German involvement in some of the more creative legal acrobatics undertaken by the European Union. These include the establishment of the EU emergency bond-buying plan known as the Outright Monetary Transactions program. In that case, the German Federal Constitutional Court proceeded with caution and referred the case to the European Court of Justice. But there are strong indications that it could be more aggressive in future cases. A rejection of government moves in a landmark case, such as one involving potential German participation in a strengthened quantitative easing program, could derail the Continent's recovery.

Economic policy is not the only issue on which the court has proven to be a thorn in German Chancellor Angela Merkel's side. German electoral law currently requires a party to win a minimum of 5 percent of the national vote to enter the national parliament, a measure designed to keep small radical parties out of an already relatively fragmented parliament. Berlin used to apply a similar threshold to German parties seeking access to the European Parliament. The German constitutional court recently struck down this requirement, and some politicians fear it could soon do the same for German federal elections. The current surge in popularity of nationalist parties heretofore excluded from the legislature may jeopardize the existence of a strong government in Berlin, the only real decision-making body in a battered Europe.

The court's current course of action poses an existential threat to Merkel's political career and to Germany's economy and stability, which continue to depend on the health of the European Union and the economies of its constituent members. Should the court so rule, Germany could rapidly lose its place as the Continent's strongman, being condemned instead to internal paralysis as it watches Europe slowly stagnate.

As with most of the really important developments in Europe, the battle between the court and the German government will be drawn out and will remain out of the public eye for now. Still, the very existence of open discussions about reducing the power of one of the most trusted and impartial institutions in Germany testifies to how seriously the chancellor's office takes the danger of the fallout from the court's potential ruling.

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OCTOBER 21, 2014  | PM Rating: B+
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