The eurozone is on the verge of meltdown, taking whole economies and banking systems with it, and spreading to the US through the systemic interwiring of the international financial system. Or not. European meetings to avert disaster are coming unglued and the moment when the markets simply stop turning over debt and re-lending is finally at hand, with a tipping point reached against one or another of the economies beyond Greece. Or not.
I’m reasonably sophisticated in international economic law, and pay close attention to these things. I require my students to follow the European debt crisis closely, and I make a point of engaging in discussions with colleagues and friends in the economics, business and finance worlds to try and understand what’s going on. But if you are like me, as a business law professor you are never quite sure what to make of the reports that come from political economy on what is happening. And even more, you are not quite sure where to locate the role of lawyers and law in this discussion. I don’t mean the role of lawyers in the sense of sophisticated finance people who start in law but gradually take on interdisciplinary expertise; that describes a lot of the players in this world, including lots of law professors.
I mean the role of lawyer and law in the questions of governance, structures of governance, the constitutional arrangements of the the EU, the eurozone, the law of the central banks, and down from the supranational to the national. The economists and most of the political types I speak with do not believe that law is decisive in decisionmaking in this kind of urgent situation; it is epiphenomenal on what the politicians and markets do, and law will be rewritten, reinterpreted, reconfigured either in the event or afterwards to express the new political reality. At most, there are hiccups – such as the German Constitutional Court decision in September that, if I understood it correctly, both grudgingly blessed the bailouts already taken but put serious new national law-based constraints on future ones. But, say my political economist friends, that’s just the occasional roadbump. The hurdles are not legal ones in the EU, however much it appears to be a creature of treaty, law, and regulation. It is a discretionary regime in its most important economic crises – as perhaps are all large democratic economies and common markets, including the US (Cf. Hank Paulson’s handful-of-paragraphs trillion dollars in 2008). (The questions of sovereign debt covenant interpretation, or the triggering events in credit default swaps, or other private contract issues of course have always been understood to be about law and lawyers; the concern here is about public constitutional law.)
I keep wondering whether law is quite so beside the point, even in what some would call a Schmittian moment of crisis. (That would be a mistaken characterization, in my view, but a tempting one, and I don’t mean necessarily mean Posner and Vermeule, but Carl Schmitt’s direct intellectual heirs and students in Europe.) Even without reaching to Schmitt, however, from a governance and constitutional standpoint, one could argue that the discretionary elements of the system turned out not to establish the best of all possible worlds – apparently rule-governed, but actually highly discretionary – but instead the worst. (This is, by the way, a distinctly legal issue, by contrast to the best-v-worst observations made about the economics of optimal and unoptimal currency zones.)
It’s not so much that I want to stake out a claim, but to raise once again the question of what the implications of this are for the constitutional theory of the EU, and for the economic governance of the eurozone, where governance means something that has to be written down in the law and regulation of the European Central Bank and other institutions. Germany and others are saying that the rules have to mean what they say; others say not so much that the rules aren’t clear as that, or that they are revisable in a crisis.
This looks as much to be a governance and constitutional crisis as an economic one, in other words, and a crisis in which law will play a part before and after. The rules, at least to an outsider, on such things as fiscal transfers, the legal mandate of the ECB, seem pretty clear. Maybe there is a jurisprudence that paves a plausible path to what the politicians contemplate, but it doesn’t seem so easy, at least to important constituencies in the eurozone. When the newspapers report that, well, the proposal was to leverage the bailout fund in various ways – but that the lawyers advised that this violated various EU laws, that seems to be law playing a pretty independent precipitating role. And what about the aftermath, if the discretionary revisions prevail to rules that important players assumed were not subject to revision? What is the constitutional rule that obtains here, and is it a rule on which markets and national leaders can use to make stable predictions?
I realize the moment of crisis is not the right moment to rewrite constitutional theory, but surely there is more discussion going on somewhere, not just of the specific laws at issue, but of the underlying principles of constitutional decision and action at issue here. It doesn’t seem sufficient to merely read a note in the Financial Times or the German newspapers that political leadership had been advised by lawyers that the bailout fund can’t be leveraged, or that common issuance of eurozone debt is harder as a legal matter than it looks. But I’m not a European Union lawyer.
Here is an example of what I mean by the sense that in the eurozone crisis, law is a follower, not a leader, and at most a negotiable hold-up. This is drawn from one of my favorite economists, the Very Great Tyler Cowen, on how to exit the eurozone. From the end of his post (emphasis added):
Let’s sum up which problems have been addressed and which not. The domestic banking system is saved, at least provided the new conversion rate is credible enough that no one expects a repeat of the depreciation. It’s key to make that first announcement a real surprise, good luck! A negative wealth shock will come anyway and my plan has accelerated the arrival of that shock; the best one can do is to combine it with monetary expansion and the positive export shock from devaluation. To fix the external banks, the wealthier countries will need to exercise and perhaps improve their LOLR [Lender of Last Resort] powers, but that is the case under any plan, not just this one.
Admittedly this plan makes the wealth loss in Ruritania quite transparent, which may be politically unpopular, but that transparency eases the economics of the transition.
Voila! Rinse and repeat as necessary. A lot of this would be eased by high inflation from the eurozone itself but a) that would involve collateral costs on the healthier economies, and b) in any case it doesn’t look like it will happen. I’m sticking with what a small country can do on its own.
No need to write in the comments section that this is “illegal.” Breaking the three percent deficit rule, as France and Germany did, was illegal too. Ruritania will not be hauled before a court of law and I also predict Ruritania will not be ejected from EU per se. Maybe their agricultural subsidies will be cut, let them eat floating exchange rates I say.
This is drafted, from my international contracts lawyer point of view, the way a business person would draft a term sheet – a summary roadmap through the practicalities of business, finance, and some political considerations. But the legal and regulatory issues are essentially treated as revisable or else some form of negotiable hold-up; problems for the lawyers to work out but not as deeply part of the economic deal. They act as constraints on this account, transaction costs that must be paid off – but not truly “constitutional” constraints.
I mean by that, constraints in law that are more than just “hard” to change, but which are hard to change because they are part of a constitutional order, in which the constraints carry important legitimacy all their own that arise because they are, well, constitutive. Built into the structure in a way that is hard to change because people wanted it that way, to tie their hands into the future in a mutual undertaking in which people came together to tie not just each other’s hands but their genuinely collective hands, people together – and to tie the hands of the people who would come after. This idea of the independent power of legitimacy, and the function of constitutionalism as more than just a “really big holdup” is, in my experience, very hard to convey to economists, mostly because their world-view doesn’t make room for the underlying concept. At most, there’s some handwaving in the direction of “Oh, you mean institutional economics.” Actually, I mean more than that. I mean “constitutional law.”
But then Tyler Cowen points to a rather serious problem for my argument above. For years, we have been told in endless academic papers, books, symposia – mostly funded, however, by the EU in its one-way ratchet of ideological integration – that the EU is indeed a constitutional order, but of a special kind, a new phenomenon in the world, one that has the best of all possible worlds – polis creating its own demos, simultaneously a supranational order but also a merely multilateral collection of sovereignties, etc., etc. Antinomies that somehow all resolve for the best. My reaction as an academic was, well, maybe, let’s wait and see; I understand that political leaders can’t wait on academic history but must make their choices and act. But when push comes to shove, the constitutive rules didn’t prove to bind even the leading principals, as Cowen points out, and discretionary political leadership prevailed instead. And apparently it prevails now.
So this is a problem for my argument that constitutional hurdles in the EU are more than just hard-to-negotiate-away rules, but instead have the legitimacy of constitutive rules. Maybe in the EU they don’t. They are hard to get around, but they can be got around with enough political finesse and cover. In that case, however, a core “strategic ambiguity” at the heart of the EU project – no bailouts, is this a revisable rule or constitutive constitutional norm? – is suddenly forced to a choice. I suppose one can say these are just “growing pains” for a new constitutional order, which will take decades and decades to consolidate around genuinely constitutive rules; I have my doubts that this is how it works, in the absence of a genuine demos, but I’m an American and have a different view of sovereignty (Lincoln: “a political community, without a political superior.”) But still, if on a matter of crucial economic relations, the “rules” are revisable from moment to moment – is there still a “constitution” at the heart of Europe?