Rome and after: the microeconomic constitution

We shall use ‘economic constitution’ as a neutral concept, that is, not attached to any specific economic model. But in exploring European economic constitutionalisation, especially in its first decades, due attention must be paid to the ordoliberal school of legal and economic thinking, which introduced constitutional discourse at the European level. This school interpreted – and still interprets – the economic constitution in terms of a comprehensive decision (Gesamtentscheidung) or system decision (Systementscheidung) in favour of a distinct ideal model of the economy: the market economy, premised on performance-based competition (Leistungswettbewerb). Only beginning in the 1990s did the term ‘economic constitution’ gain wider currency in scholarly discourse outside Germany, and only then did it start to escape from the confines of market-liberal economic thought and receive more neutral connotations.

It may seem natural that constitutional discourse and, by the same token, constitutionalisation started out in the economic dimension. In the first decades of its history, say, up to the Maastricht Treaty, European integration was almost exclusively an economic project. But it was not self-evident that the economic orientation of the Community would be conceptualised with a constitutional vocabulary. The very term ‘economic constitution’ stems from one particular legal culture – the German one – and even there the corresponding concept has been highly contested. Opinions on who, exactly, is to be regarded as the father of the term seem to diverge, but general agreement prevails on the crucial age. This was the Weimar period. Hugo Sinzheimer applied the term to the multi-faceted and multi-tiered corporatist organisation for economic decision-making, set out in the Weimar constitution but never really established.

The Maastricht legacy

The new layer of the European economic constitution, introduced by the Maastricht Treaty and reinforced through the Stability and Growth Pact, was underpinned by certain fundamental principles. For Member States joining EMU, monetary policy was defined as an exclusive Union competence and assigned to the ECB. The ECB was seen as an expert body which was supposed to focus on pursuing the specific monetary-policy objective of price stability. Its position as an expert body was buttressed by an enhanced independence from external influence, whether from other Union institutions or from Member States. In contrast, in fiscal and economic policy Member States retained their sovereignty, while the Union was to possess merely coordinating functions. Yet, fiscal sovereignty was not absolute but circumscribed by constitutionally defined reference values on budget deficit and public debt. Restrictions on fiscal sovereignty reflected the primacy of the monetary-policy objective of price stability; they were expected to impose on Member States the budgetary discipline which a monetary policy focusing on price stability was seen to require. In addition, they addressed the probability that in a monetary union negative repercussions of reckless fiscal policy in one Member State would spill over to all the others. Hence, specific preventive safeguards were adopted to ensure prudent fiscal policy. Member States’ fiscal sovereignty found its reverse in their fiscal liability, expressed by the no-bailout clause in Art. 125(1) TFEU. The EU in general and EMU in particular was supposed to be no ‘transfer union’, but only to allow for strictly limited financial transfers from the European level to Member States or from one Member State to another.

This is a book about relations: relations between constitutional law and economy, but also between different dimensions of the constitution and different layers of the economic constitution. These relations transfer and transform the effects of shocks introduced by the economic crisis, and, by the same token, testify to the interconnectedness of the constitutional system. Often enough, relations take the form of open-ended dialogues. We hope to make a modest contribution to these dialogues by pointing to some hitherto neglected connections and repercussions.

The German ordoliberal school has pursued the ambitious project of combining legal and economic scholarship; much more ambitious, we would argue, than the law and economics movement of recent decades. Law and economics have mainly been content with buttressing legal reasoning with policy arguments drawn from an economic assessment of alternative readings of law. In contrast, ordoliberals have sought cooperation between law and economics at a deeper, conceptual level. In this cooperation both partners are supposed to learn from each other. Thus, lawyers are not merely at the receiving end, as is their lot in law and economics.

The Eurozone crisis possesses many aspects. Most conspicuously, it has manifested itself as an economic, financial and fiscal crisis; as increasing unemployment and laggard economic growth; as bottlenecks in the financial system as well as liquidity and solvency problems of financial institutions; and as mounting public debt and threatening state insolvency. But at issue is also a constitutional crisis. The crisis has shaken the foundations of what we shall term the second, macroeconomic layer of the European economic constitution. The Maastricht principles of the European economic constitution are teetering, with implications reaching out beyond the economic dimension and extending to the national level, too. A constitutional analysis of the crisis must adopt a broad perspective and a comprehensive analytical framework.

Our discussion of the constitutional implications of the Eurozone crisis is based on a specific understanding of what constitutions in general and the European constitution in particular are about. In the nation-state context, especially in the revolutionary French and American traditions, constitutions are seen as unified normative entities which result from the exercise of constituent power – pouvoir constituant – by the people – the demos – at a clearly definable constitutional moment. This tripartite conceptual apparatus – ‘constituent power’ – ‘demos’ – ‘constitutional moment’ – is not applicable to the European constitution: there is no unified European constitution to which the European citizenry would have given birth as an expression of its constituent power at a particular constitutional moment. When discussing the European constitution, revolutionary constitutional concepts must be replaced by an evolutionary counterpart; namely constitutionalisation. Characteristic of the European constitution is its process-like nature; it is not a temporarily and substantively clear-cut normative entity but, rather, a continuous process of constitutionalisation.

European reactions to the Eurozone crisis fall into three categories. First, rescue packages have been assembled to pull the worst-hit countries out of the most acute difficulties, and financial stability mechanisms have been established. The objective has not merely been to provide emergency assistance but also to avert contagion and to enhance the confidence of financial markets in the euro area’s ability to cope with the situation. Second, emergency measures and building financial and institutional capacity to meet future crises have been flanked by efforts to strengthen European economic governance. Here the aim has been to remedy the insufficiencies and inefficiencies of the Maastricht constraints on national fiscal economic policy which had proven unable to prevent turmoil erupting in Spring 2010. Third, interventions by the ECB have supported and complemented other emergency measures, at times even playing a decisive role. In the following, we shall outline the major developments on all three fronts and then turn to their constitutional analysis in Part II. As a prelude, we shall summarise European reactions to the financial turmoil which preceded the fiscal crisis.

Prelude: tackling the financial crisis

As late as June 2007, the ECB raised interest rates, which was a token that the upcoming financial crisis was not yet foreseen. The first larger-scale indications of the upcoming financial crisis only became apparent in the latter half of 2007. The ECB responded with a series of measures that were mainly intended to ease liquidity shortage and ensure market funding for banks. General announcements on liquidity policy were accompanied by fine-tuning operations addressing short-term nervousness in the money market. As these were considered insufficient, the ECB engaged in a series of ad hoc or supplementary measures to guarantee longer-term financing to the banking sector and to normalise conditions in the money market.

European responses to the Eurozone crisis raise constitutional issues in both the European Union and its Member States. Furthermore, constitutional implications can be discussed at two levels, remembering the multi-layered nature of constitutions in general and the economic constitution in particular: in addition to explicit constitutional provisions and precedents, constitutions include a ‘sub-surface’ level of underlying principles, concepts and theories. In this chapter, we focus on doctrinal questions, related to ‘surface-level’ constitutional law and postpone ‘matters of principle’ to Chapter 6. Of course, these two levels neither can nor should be hermeneutically isolated from each other. The tougher doctrinal issues are, the more frequently legal argumentation must take recourse to the principles underlying individual provisions. Principles, in turn, can only be identified through the traces they have left in such ‘surface-level’ constitutional material as the Treaties or the case law of the ECJ, i.e. the constitutional court of the EU. It is perhaps more appropriate to speak of different emphases than two separate levels of discussion.

We shall argue that the Pringle judgment of the ECJ, together with the amendment to Art. 136 TFEU, which explicitly acknowledged Member States’ competence to establish a stability mechanism, have confirmed that significant changes in the macroeconomic constitution have occurred. We take these for granted, deferring to the weight the speech acts of the constitutional legislator and the constitutional court (ECJ) have in EU constitutional discourse. Yet, we feel free to criticise the argumentation in the Pringle ruling and the preceding view of AG Kokott, as well as in European Council Decision 2011/99 on the amendment to Art. 136 TFEU. Furthermore, we shall comment on the constitutionality of ECB action and thus enter a territory largely uncharted by constitutional scholarship. We shall also discuss the constitutional basis of reinforced economic governance, in particular the reach of Art. 136(1) TFEU in justifying specific Eurozone measures and the use of intergovernmental agreements to circumvent political obstacles blocking recourse to primary or secondary EU legislation.

This new contribution from Kaarlo Tuori and Klaus Tuori, offering an innovative constitutional analysis of the Eurozone crisis, is an important addition to the series Cambridge Studies in European Law and Policy. Combining expertise on law, theory and economics, the authors are able to open our eyes to the many aspects of the Eurozone crisis and its ramifications for societies and polities. They want to take us beyond thinking about the crisis merely as a financial crisis, a crisis of the banking sector or a threat to public debt, and to give it a broader public order and constitutional perspective. The Eurozone crisis goes to the very heart of the European constitutional order, understood in a multi-perspectival manner to incorporate both the legal order sustained by the EU treaties, and also the systems of the Member States. The Eurozone crisis thus entreats us to consider also issues of democracy and transparency, as well as issues about the values which underpin our societies in the early twenty-first century including issues around security in its widest sense. Tuori and Tuori, through a historically and conceptually grounded analysis, show how these issues are intimately linked to each other. We warmly welcome this volume to the series.

The constitutional principles of democracy and transparency

In the constitutional respect, the Eurozone crisis has not appeared only as a crisis of the macroeconomic constitution and entailed a significant change to the Maastricht principles. It has had important repercussions in other constitutional dimensions, too, primarily political and social. All the constitutional dimensions possess an institutional aspect. The institutional structure of the Union can be examined in the context of ‘substantively’ defined constitutional dimensions, and, indeed, analysing the status and mandate of the ECB has formed an integral part of our discussion of the macroeconomic constitution. But the institutional structure can and should also be explored as a whole; as a vital element of the political constitution, and in the light of the particular principles and values of this constitutional dimension. Evidently, the Eurozone crisis has lifted the macroeconomic constitution into a pacemaker position among the many constitutions of Europe. The economic constitution is clearly defining the agenda for the political dimension. Mutation of the macroeconomic constitution and expansion of the functions of expert institutions beyond their original role have consequences for the political constitution as well. The obvious danger is that the economic constitution also dictates the terms of development, so that insufficient attention is paid to specifically political constitutional values, such as democracy, transparency, legitimacy and accountability. This danger is enhanced by the sneaking, piecemeal mode in which the political constitution is being remoulded under the impact of the economic one.

Since the second half of 2012, financial markets have calmed down at least temporarily and the worst financial and fiscal crisis appears to be over. In the relative tranquillity, European institutions could focus on reflecting on the lessons of the crisis, as well as the need to develop EMU and to prevent future crises. Yet with the crisis easing, the enthusiasm for reforms appeared to decrease, too. Thus, despite the quite far-reaching reform plans on the table, the results of the subsequent meetings of the European Council have been meagre.

In June 2012, a Working Group consisting of the Presidents of the European Council, the Commission, the Eurogroup and the ECB, headed by Van Rompuy, put forth a scheme for a comprehensive reform of the EU. The scheme was further elaborated in the following months and received its final shape on the eve of the December 2012 European Council meeting. A more ambitious initiative for “launching a European debate” – ‘A blueprint for a deep and genuine economic and monetary union’ – was produced by the Commission and published on 30 November 2012. The European Parliament’s major contribution to the discussion is a Resolution of 20 November 2012 on the report of the four Presidents. Furthermore, the Commission has produced documents on individual parts of reform packages, in particular the proposed banking union.

Three secular trends

The sovereign debt crisis was the most dramatic manifestation of the Eurozone crisis. It also led to the most profound changes in the European macroeconomic constitution, with important spillover effects in the fields of the political and social constitution. Yet, it was only the last phase in a series of predicaments which hit most of the developed economies beginning in late 2007. The Eurozone crisis was a result of manifold economic factors, which include both long-term secular trends and more recent developments. Together the long- and short-term factors explain why so many of the underlying economic assumptions of the Maastricht macroeconomic constitution proved to be mistaken and why the Eurozone responded to the crisis in the manner it did.

Three secular trends in the global economy, which were more or less neglected in drafting the European macroeconomic constitution, need to be recognised in order to understand the root causes of the crisis: a constant increase of private and public debt in the developed economies since the beginning of the 1980s; inclusion of the emerging economies (EME), particularly those in Asia, in the global economy; and the trend-wise decline in the volatility of GDP growth and inflation which came to be known as the Great Moderation but which could in effect have been a change in the nature of economic cycles from shorter-term traditional cycles to medium-term financial cycles.

The privatization of public pension systems is commonly viewed as imperative to ease the strain on nations' fiscal resources. Yet, the overhaul of state pension systems is a high-risk political endeavor. Because privatization replaces the principle of public social insurance with individual responsibility for old age income, organized beneficiaries of state pension benefits will vehemently oppose reform. Structural pension reform is also perilous from a financial cost perspective. By channeling pension contributions away from public to private pension funds, the government accumulates a deficit to cover the current pension liabilities during the reform's transition period. Since the costs of pension reform accrue immediately but the long-term benefits – lower fiscal outlays – do not materialize until the distant future, it hardly surprising that governments pursuing such a strategy often suffer electoral defeat (Pierson, 2000b; Jacobs, 2011).

Given the high risks associated with the reform of state pension systems, it is puzzling to observe that this measure was adopted by so many European countries in the 1990s and early 2000s. During this period, several European governments have either privatized their pension systems or introduced funded components. Existing studies do not offer unequivocal conclusions about the causal pathway of reform because they concentrate on a single impetus instead of probing a variety of possible explanations. Works attributing pension reform to purely domestic pressures, such as rising longevity, low fertility, and concomitant financial exigencies (Taverne, 2001; Disney, 2003) cannot account for the timing of pension reforms.