Germany's Constitution Court today (12 September) rejected efforts to block the European Stability Mechanism – the eurozone's €500-billion bailout fund – paving the way for the country's ratification of the fiscal compact.
The ESM is seen as central to solving the euro crisis. Its proponents believe that it would give the European Central Bank (ECB) the muscle to buy Italian and Spanish debt. This in turn would allow them to bring down their borrowing costs. ECB chief Mario Draghi said that the ESM was needed to buy the debt of troubled countries.
In rejecting injunction requests from 37,000 plaintiffs, the court said that ratification of the ESM could go ahead with the "proviso" that German liability be limited to €190 billion, as agreed in the ESM treaty.
The plaintiffs, including eurosceptics from Chancellor Angela Merkel's ruling centre-right coalition and hardliners from the left-wing party, Die Linke, had argued that the treaties exposed Germany to unlimited financial liability and ceded too much sovereignty to European authorities.
The court also requested guarantees that there would be no increase in German financial exposure to the bailout without previous approval from both houses of the German parliament, rejecting a confidentiality clause in the treaty.
“My first reaction would be that this probably cannot be done by just agreeing in the German implementation law that the conditions are met,” said Guntram Wolff of the Brussels-based think tank Bruegel. “It may require changes in the ESM treaty or a new side treaty to the ESM.”
German critics argued that the German liability was not limited to €190 billion as had been explicitly stated, but could be higher if the issue price of the authorised capital stock is increased.
“My suspicion is that it will significantly delay the implementation of the ESM,” added Wolff in his blog.
Other analysts, however, believe that the court has reached the best decision possible for the ESM. “It contains no nasty surprises but merely strengthens the role of the Bundestag,” said Sony Kapoor, director of the Re-Define economic think tank.
Kapoor said that the decision had no implications for the ECB, or its possible interventions in the bond market. It did not preclude the possibility of the ESM being granted a banking licence at some future date either, he said.
However, the ESM remains inadequate in size and has a cumbersome decision-making process that gives Germany, France and Italy a de-facto veto on some critical decisions, he added.
Irrespective of the strings attached to the court ruling and the cautious welcome of some analysts, the news was welcomed by markets, with the euro hitting a new four-month high against the dollar – $1.29.
When it comes into effect, the ESM will provide a €700-billion firewall against the spread of the three-year-old debt crisis. Germany is the only country which still needs to ratify the arrangement, but the court’s decision clears the way for the country's president, Joachim Gauck, to sign the ESM into law.
The president of the group of eurozone finance ministers, Jean-Claude Juncker, reportedly said that the ESM could start working from 8 October.
Sigh of relief
European Parliament leader Martin Schulz announced the news to MEPs during the State of the Union address by European Commission President José Manuel Barroso in Strasbourg. The Court’s decision was greeted with thunderous applause and evident relief on the face of political leaders.
German leaders also expressed relief at the court’s decision. Foreign Minister Guido Westerwelle from the liberal FDP said the court ruling was a wise decision, echoing the German constitution’s pro-European spirit.
"The limitation of Germany's liability within the ESM was necessary. Germany's capability should not get worn out," he added.
"Finally the ESM can start working and support the process of stabilisation during the euro crisis,” said Frank-Walter Steinmeier, leader of the Social Democrats in the Bundestag.