A tense two-month wait to settle the fate of the European rescue fund ended Wednesday when Germany’s highest court declared the fund in line with the German Constitution—under certain conditions.
The European Stability Mechanism (ESM), designed as a permanent institution to provide emergency financial aid to eurozone members in need, is seen by European leaders as a crucial ingredient in solving the ongoing European debt crisis.
The treaty is on hold until Germany, as its biggest contributor, ratifies it. Germany will contribute just over 27 percent. France is the next biggest at roughly 20 percent, followed by troubled Italy at just under 18 percent.
The Constitutional Court ruled that injunctions to prevent the German president from signing the ESM into law are “unfounded … for the most part,” according to a court statement.
The injunctions were brought forth in June by a variety of groups and individuals including a former justice minister, and a grass-roots democracy organization representing more than 30,000 citizens, thus putting the law in limbo.
The court laid out clear requirements Germany has to follow in order to ratify the ESM.
Similar to an earlier ruling on the first Greek bailout in 2011, it stressed, “The members of the German Bundestag must retain control of fundamental budgetary decisions even in a system of intergovernmental governing.”
The court demands that both houses of the German parliament, the Bundestag and Bundesrat, need to approve any large-scale European aid programs that use the fund. Additionally, members of Parliament need to be comprehensively informed on the every rescue measure being considered.
This requirement will likely answer some of the concerns of those who saw the ESM and other euro rescue measures as undermining German and European democracy.
Matthias Schäfer, an economic expert at the political foundation Konrad-Adenauer-Stiftung, sees the court decision as a “moderate compromise” that will give politicians and markets crucial planning security for the following months, while also assuring votes and taxpayers.
To Schäfer, a key element of the ruling is that it gives the German public “a clear signal that Parliament ... continues to be in charge how the eurozone architecture is evolving.”
Nevertheless, Schäfer says the ESM is “not the solution to the euro crisis,” but just one piece of a comprehensive strategy. Other proposed measures, like structural reform in debtor countries, and better eurozone-wide coordination for macro economic decisions, are equally needed.
One of the most important conditions imposed by the court is capping Germany’s payment obligations to the ESM at 190 billion euro ($245 billion), the biggest share of any country. This will make it almost impossible to extend Germany’s liability without a decision by the Parliament—a fear harbored by many Germans.
The contributions will be made within a five-year period, after which a new treaty would be needed under German law.
Open Europe, a U.K.-based think tank, said the cap could prove to be “real obstacle for large-scale eurozone bailouts down the line,” since the current lending volume of the ESM of 500 billion euro would not be enough to help Spain and Italy, according to an article on its website.
Wednesday’s court ruling constitutes only a “summary review,” with the full ruling to expect in early 2013. Most observers however, doubt that it will bring any surprises.
Markets around the world reacted positively to the decision, while Europe’s leaders responded with relief.
“This is strong signal to Europe! Germany takes its responsibility seriously,” German Chancellor Angela Merkel said, according to a statement.
One of the main questions surrounding the ESM is how it will function given that some of its biggest contributors, Italy and Spain together representing nearly 30 percent, are themselves on shaky ground.
Analysts see two possible scenarios. The first is that Italy and Spain manage to turn around their economies and the market believes that Europe’s bailout structures, with the support of the European Central Bank (ECB) will work. This would entice private investors to keep buying Italian and Spanish bonds, thereby reducing their costs of funding to a manageable level.
If Spain and/or Italy need a rescue, then the ESM would lose its relevance and the only credible entity to backstop Europe would be the ECB. Germany may take its responsibility seriously, but it could not carry the burden just by itself.
Additional reporting by Valentin Schmid
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