At 10am in Germany on that day, the eight scarlet-robed judges of Germany’s Verfassungsgericht or Constitutional Court will file into the courtroom in the southwest city of Karlsruhe to decide whether German President Joachim Gauck can sign into law the Eurozone’s key crisis-fighting tools.
The German parliament has already voted in favour of the European Stability Mechanism (ESM) and the European fiscal pact with a two-thirds majority at the end of June.
But Gauck held off from completing the ratification process because of a number of legal challenges filed by the far-left Die Linke party, a citizens’ initiative group called “More Democracy” and a well-known Eurosceptic from Chancellor Angela Merkel’s CSU Bavarian sister party, Peter Gauweiler.
They argue that the ESM – the EU’s permanent 500 billion Euro (B18 trillion) rescue fund – and the fiscal pact were incompatible with Germany’s “Grundgesetz” or Basic Law because they are effectively forcing Germany to surrender its budgetary sovereignty without the necessary democratic backing.
By committing Europe’s biggest economy – and already its effective paymaster – to the ESM, parliament is essentially exposing Germany’s public finances to unlimited risks should one Eurozone country after another topple under the debt crisis, they argue.
And that means German voters’ basic democratic rights are being infringed upon.
In addition, the critics argue that the ESM breaches the “no bailout clause” of the EU’s Maastricht Treaty, under which Germany agreed to relinquish its revered Deutschmark on condition there would be no direct or indirect sharing of Eurozone members’ debt.
The ESM, which will replace the temporary European Financial Stability Facility, should have been up and running by July 1. But it needs Germany’s share of the rescue money to function and has thus been held up pending the Constitutional Court’s ruling.
On September 12 the court will not rule on the constitutionality of either the ESM or the fiscal pact.
It will simply decide whether to grant temporary injunctions sought by the plaintiffs that will prevent President Gauck from signing the legislation into law until a final ruling can be made next year.
If the court dismisses the plaintiffs’ case, everything will be fine; Gauck can sign the legislation and the ESM can at long last become operational, much to the relief of the financial markets.
But if it grants the injunctions, it could trigger fresh financial turmoil as markets will take this as a sign the court believes that the ESM and the fiscal pact are incompatible with Germany’s constitution, effectively killing off the ESM.
Expectations ahead of the ruling are correspondingly at fever pitch, with doomsday scenarios doing the rounds that the Euro may immediately break up.
Analysts, however, are not so alarmist.
“A failure to ratify the treaty would probably not result in an immediate break-up of the single currency,” said Marie Diron, senior economics adviser at Ernst & Young Eurozone Forecast.
“But it would increase volatility in financial markets and reverse the recent period of calm that has helped confidence slowly return to the Eurozone.
“We could be back to the darkest periods of extreme volatility and investors’ risk aversion which would have a significant negative impact on the outlook for the Eurozone,” she said.
Analysts at Morgan Stanley see a 40 per cent chance that the court will not give its green light, at least just yet, have warned that a hold-up “will likely have major repercussions for financial markets”.
The court was already assured by experts back in July that a delay would not cause major problems because the ESM’s predecessor, the temporary EFSF, is still in place.
But it could put a question mark over rescue money for Spanish banks, noted Diron at Ernst & Young.
Other sources said the risk is not that the court will reject the ESM, but that it will further extend parliamentary control, which will, they believe, make things very difficult to operate.
Mattias Kumm, a law professor at Berlin’s Humboldt University and a constitutional expert, believes there is a 25-30 per cent chance that the court will rule the ESM is unconstitutional.
And that, in turn, he says, could lead politicians to decide to change Germany’s constitution, which would require a referendum.