September 12, 2012. This is the date that may ultimately decide the fate of the Eurozone.
It has nothing to do with Greece, Spain, Italy, or any of the other problem children of Europe. No, it is Europe’s stern schoolmistress Germany that holds the fate of the currency zone in the balance.
On September 12, the eight justices of Germany’s constitutional court will meet to decide the legality of the Eurozone’s rescue fund or, more accurately, the legality of Germany’s participation in the bailout fund under the German constitution. Should Germany back out due a court veto, it’s difficult to see the euro surviving the crisis of confidence that would follow.
Americans are no strangers to debates over constitutionality; the 5-4 decision to uphold the ObamaCare legislation was one of the biggest headlines of 2012. But the German debates are a very different animal.
There are two competing clauses in the German constitution. One declares Germany to be “a democratic and federal state” with power determined “through elections and other votes.” This would seem to preclude Germany from granting control of its budget to an EU watchdog or obligating the German state to bail out Eurozone neighbors; the judges have already questioned whether such transfers of sovereignty are permissible.
But then, the German constitution also calls for Germany to strive for a “united Europe,” which would be presumed to include some degree of fiscal union.
In effect, the fate of Europe depends on which clause of the German constitution the justices decide take precedence.
When clients ask me “what keeps you up at night,” this is it. I fear that lack of German commitment could cause the entire European project to unravel.
If the German court finds the bailouts unconstitutional, then Germany would have to amend or even rewrite its constitution in order to participate—which would require a referendum. And how likely does that sound?
Even if a charismatic leader were to convince German voters that constitutional change is the right thing to do, these things take time, and time is a luxury that Europe doesn’t have at the moment.
Now that I have sufficiently scared you, I should point out that I do not see the German constitutional court torpedoing the bailouts.
They know what is at stake, and they don’t want to be responsible for the death of the European project.
Still, investors have to consider the “what ifs” when they put capital at risk, and it makes sense to keep a little cash on the sidelines “just in case.” It wouldn’t be the first time that ideology trumped pragmatism in a high-profile court case.
If we get a selloff in the days leading up to the court’s decision, I would view it as a buying opportunity. But, if the German court strikes down the bailout facility or attaches so many conditions as to make it unworkable, I recommend that investors sell all European equities and all but your highest-conviction core American positions as well. Because at that point, the probability of a full-blown meltdown on par with that of 2008 becomes uncomfortably high.
This article originally appeared on MarketWatch.
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