(This interview appeared in SAFE Newsletter Q3 2017)
In this interview, Matthias Goldmann, Junior Professor of International Public Law and Financial Law at Goethe University, emphasizes that legal rules change with their context – a flexibility that is important in times of crisis but conflicts quite often with the expectations of economic actors who neglect the scope of discretion on the part of courts and administration. Matthias Goldmann contributes to the Research Center SAFE and the Cluster of Excellence “The Formation of Normative Orders” and is a Senior Research Affiliate of the Max Planck Institute for Comparative Public Law and International Law in Heidelberg.
You are investigating the role of law in the democratic organization of the economy with a special focus on the financial system. Why finance?
In finance, law plays a particularly important role. Not only does it provide the framework for all financial activities, it is also the basis of all financial instruments. Even money itself is, in principle, a product of law. Another reason is that the relationship between law and finance seems to me particularly ambiguous, both in respect of how it works in practice and how it is understood in academia. The general public, including financial economists, often seem to understand law in a rather mechanical way. For example, they discuss whether the economy should better be regulated by strict rules or by principles that allow for some discretion on the part of the decision-makers, implicitly assuming that rules are precise, predictable, somehow a-political tools.
You wouldn’t say that rules are precise?
Not in the sense that many people expect them to be. The basis of rules is language and the meaning of language depends on its particular context. That makes law by nature uncertain and subject to change. As long as things run smoothly, there are usually no major debates on how to interpret a contract or regulation. However, when the context changes, in particular in case of a crisis, our understanding of the law might change as well, in line with the new political and economic situation. In that way, law is able to accommodate tensions between politics and the economy, rather than increasing them.
To give an example: In November 2012, the European Court of Justice (ECJ) decided that the ESM Treaty did not conflict with the no-bailout clause of Art. 125 of the Treaty on the Functioning of European Union (TFEU). The plaintiff had argued that the original idea behind this Article, to provide an incentive to member states to keep their budget and debts under control, would not allow for any bailouts. This argument – which I also heard many times from economists – assumes that law is a strict instrument imposing a “red line” with mechanical precision. In its judgment, however, the Court put the emphasis on the purpose of the bailout clause, instead of the drafting history. It held that Art. 125 TFEU should prevent debt crises, but not facilitate the breakup of the Eurozone once a debt crisis occurs. It therefore allowed for bailout policies that are tied to conditions aiming at re-establishing fiscal self-reliance. All of this is within the scope of accepted legal methodology.
As a consequence, judges have a larger degree of discretion in interpreting rules than most people would expect.
Exactly. When I look into several regulatory projects, I try to trace the expectations different parties had when this regulation was enacted. Quite often people expect law to be more stable than it is. But law needs to be flexible. Were it not able to adapt to changing contexts, it is very likely that economic and financial crises would be much more severe, much more frequent and much more difficult to overcome. The flexibility of law functions as a safety valve. People should be more aware of this when they agree on a regulation or take an investment decision.
This flexibility seems to add a degree of uncertainty to the entire legal system.
I would not say so. Uncertainty already exists; it is a fact of life. Law allows us to deal with uncertainty. And it does not give carte blanche to politics. The ECJ, for instance, did not simply rubber-stamp the ESM Treaty, but it stated very precisely under which conditions such an institutionalized form of bail-out would be acceptable. A similar example is the ECJ decision on the OMT program of the European Central Bank (ECB). The ECB established this unorthodox type of monetary politics in a crisis. Against this background, the ECJ accepted it, however within strict boundaries, providing for rigorous checks on the program and, thus, exercising a lot of discipline on the action of the ECB.
According to your argumentation, financial actors can never be sure whether contracts will be honored. Isn’t this confirmed by the sovereign debt crisis in Greece?
When people do not get their money back after having lent to an overindebted country that, eventually, goes insolvent or implements a sovereign debt restructuring, one should not blame the law, but instead bad investment decisions. Rather than bailing out investors with a huge appetite for risk, law has the task to stabilize the economic system, particularly in times of financial or political crises. I think it did so splendidly in the case of Greece. I would have wished that the case of Argentina had taken a similar path. Here, a New York court ordered Argentina’s banks to channel parts of the payments destined for cooperative creditors, who had exchanged their bond instruments, to uncooperative ones. Although the judge was well aware of the financial risks for the debtor state, he decided that enforcement of one creditor’s claim would not bring Argentina back into financial trouble. This position totally ignores that such a case takes place – to use the language of game theory – in a setting characterized by multiple, repeat players. Such a narrow focus on the law only makes sense if one blends out the macro perspective. In finance, this is nearly never appropriate.
If judges have to take the macro context into account when deciding on specific cases, which guidelines should they follow?
Ensuring respect for basic democratic principles is the best way for a court to take the macro perspective into account. But courts also need to respect the micro perspective, represented by human rights. Last year, the ECJ finally accepted the duty of the European Commission (EC) to respect the European Charter of Fundamental Rights when designing and implementing structural adjustment policies. The case originated from the 2012 financial crisis in Cyprus. The plaintiffs accused the EC for having forced the Cyprus government to require creditors of failing banks, including bondholders and depositors, to bear a substantial part of the costs. This was seen as a breach of property rights. The ECJ ruled that the EC must ensure that any decision it takes complies with EU law, including its Charter of Fundamental Rights. I am sure that a more proactive use of the Charter would win the EU a lot of popular support. People would not feel so powerless because there is a court that looks into their cases and reverses measures if necessary.
Given their scope of discretion, shouldn’t European institutions increase their democratic legitimacy?
Absolutely. In particular the EC, the ECB and the ECJ are not only the most powerful EU institutions but also those subject to the comparatively lowest levels of democratic control. The supposed loss of control over these institutions is certainly one of the factors that brings people up against the EU and that has contributed to the Brexit decision in the UK. Subjecting these institutions to closer control of the European Parliament would cure at least some of the deficits.