Daniel Ritort

German Constitutional Court backs euro zone bailout fund

German Constitutional Court announcing its ruling

German Constitutional Court announcing its ruling

German Constitutional Court has rejected calls to block the new European Stability Mechanism and the European fiscal treaty.

Markets rallied in relief while Angela Merkel, Chancellor of Germany, called today a good day.

However, the Constitutional Court has imposed conditions including a cap on Germany’s contribution to the permanent fund, which it said could only be overruled by the German parliament.

Some 37,000 people had signed a petition to the court asking it to block the European Stability Mechanism, and make it subject to a referendum. Critics had argued that the European Stability Mechanism commits Germany to potentially unlimited funding of debt-ridden euro zone states.

But, after weeks of deliberation, Andreas Vosskuhle, chief justice at the German Constitutional Court, said the court rejected the injunctions, since there is a high probability that the European Stability Mechanism does not violate the constitution. Also, since Germany is due to contribute 27 percent of the fund, it cannot proceed without German ratification.

However, he said ratification of the treaty could only be allowed under certain conditions. He detailed that no rule of the treaty must be interpreted in a way which would result in higher payment obligations by Germany, without the consent of the German representatives.

This means that any future increase in the size of the 500,000 million Euro fund, or of Germany’s contribution, could only be permitted with the express agreement of Germany’s parliament.

Analysts said the market relief is clearly as charts for stock prices jumped the moment the judgment was made public.

They said the positive sentiment is as much as about what did not happen as what did. They argued that if the panel of judges had blocked the European Stability Mechanism, there is little doubt that it would have halted the bailouts of euro zone countries in difficulty, and financial markets would have taken it badly.

Moreover, they said the most significant string attached is that any raising of Germany’s contribution could only be done with the full consent of the parliament, and in the current political climate, there would be much opposition to any more money from Germany.

Actually, a recent poll showed that more than half of Germans wanted the judges to block the European Stability Mechanism, so there is no mood for digging deeper into pockets, should it be necessary. When added to the money already committed to the existing temporary fund, Germany is liable for about 190,000 million Euros.

The decision clears the way for Joachim Gauck, President of Germany, to sign the European Stability Mechanism and the fiscal pact, which is meant to enforce budget discipline, into law.

Analysts said there would be huge relief in Brussels and European governments at the verdict.

Merkel told to the parliament that, today, Germany is once again sending a strong signal to Europe and beyond that Germany is assuming with determination its responsibility as the biggest economy and as a reliable partner in Europe. She concluded that this is a good day for Europe and it is a good day for Germany.

German, Italian and Spanish share index all rose after the ruling, while the Euro continued its recent gains to post a hit a new four-month high against the Dollar, at 1.29 Dollars a Euro. Also the borrowing costs on Italian and Spanish 10-year bonds fell.

Analysts stressed that, combined with European Central Bank plans to buy the government bonds of struggling countries, Europe now had the tools it needed to combat its financial crisis.

They also stated that within less than a week, the euro zone has finally received its long sought-after impressive bazooka, and, as a result, euro zone governments have now received more time to do their homework, implement reforms and austerity measures.

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