Paper Tigers: Or How Much Will Courts Protect Rights in a Financial Crisis?

Abstract

Constitutions often contain rules that are meant to constrain the behavior of future governments during crises. Anti-discrimination rules and protections against expropriation of private property are classic examples. But when crisis hits, politicians are typically tempted by their short-run interests to try to bypass these rules. Enforcement of such constitutional constraints is therefore often placed in the hands of courts. But can courts serve as effective enforcement mechanisms in crisis times? We argue that courts, deciding in the middle of a crisis, will often be tempted to convert what are supposed to be hard rules into softer standards, effectively negating the constraining effect of these provisions on policymakers. While existing literature has argued that weak courts are particularly likely to engage in such behavior when confronted by strong executives, we argue that similar dynamics can also develop between strong courts and weak executives. Using examples from the recent sovereign debt crisis in the Euro area, we illustrate both logics.