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Independent Constitutional Courts: One man’s joy is another man’s pain

Few institutions generate stronger hatred among emerging-market investors these days than Romania’s Constitutional Court. By striking down the Romanian government’s pension cuts June 25, the court sparked financial panic that led to a general loss of investor confidence in the entire Central and Eastern European region. As a result of the court’s ruling, the IMF decided to postpone its June 28 review of its €20 billion standby loan; fund managers are currently discussing the fate of the loan’s next €900 million tranche – money that the country desperately needs.

The ruling sent credit-default swap prices skywards while currencies across the region tumbled. The Romanian lei hit a record low of 4.37 to the euro on June 28. Not only investors who took the hit: Households and companies that have foreign currency-denominated loans are now at a higher risk of default than ever before, especially in Hungary, where more than 600,000 households have foreign-currency credits. Weaker currencies and higher debt-service expenses can hamper economic recovery; moreover, a rise in non-performing loans may destabilize the banking sector. It would be unjust to blame Romania’s Constitutional Court for all Central Europe’s economic hardships ¬ but its ruling is helping to destabilize the region’s still-unstable economies.

After the court handed down its decision, Romania’s government decided its only recourse was to raise the value-added tax to 24% from 19% as of July 1, or lose its IMF lifeline. Romania now has the second-highest VAT in the European Union behind Hungary, Sweden and Denmark at 25%. This kind of austerity measure will affect all Romanians, and not just pensioners. Is there anyone in Europe who is satisfied with the court’s action (besides maybe a few hundred thousand Romanian retirees)? The fact that the Constitutional Court is one of the most important democratic counterweights to the government is poor comfort to the millions who must bear the brunt of the ruling.

Across the border in Hungary, the problem is just the opposite. There, the governing Fidesz party is systematically eliminating institutional checks on its power, emboldened by a two-thirds parliamentary majority that allows the party to amend the Constitution singlehandedly. Last month, Fidesz MPs watered down the Constitutional Court’s independence by changing the rules for nominating the judges. Under the old system, each parliamentary caucus had the right to delegate one member to a committee that would nominate a judge by consensus. The full Parliament would then vote on the nominee, with a two-thirds majority required for confirmation to the court. Under Fidesz’s new rules, the governing majority will nominate Constitutional Court judges. Parliament still needs to confirm each candidate with a two-thirds majority, but Fidesz controls 68% of the seats. Fidesz can thus appoint and elect Constitutional Court judges on its own.

Fidesz’s efforts have met with harsh criticism at home and abroad. Outgoing President László Sólyom expressed his displeasure by vetoing the law on Constitutional Court nominations. However, Hungarian law makes it easy for MPs to override presidential vetoes, so Sólyom’s gesture was largely symbolic.

Romania and Hungary are grappling with problems that are mirror images of each other: In Hungary, Fidesz is meddling with nomination processes to switch off institutional controls on its powe; the Constitutional Court is just the tip of the iceberg. In Romania, an overly independent Constitutional Court is wreaking havoc across the region. The underlying tension is nothing new: Economic and governmental efficiency and the high principles of democracy are more often enemies than friends.

On the other hand, Fidesz doesn’t necessarily need the Constitutional Court to drive Hungary’s economy to near-bankruptcy; as the events of June 2010 proved, Hungary’s government is perfectly capable of doing that on its own.

Péter Krekó

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