Markets rally after Germany’s ruling on eurozone rescue fund

Markets rallied following the decision by the eight justices of the Constitutional Court in Karlsruhe to let Germany ratify a treaty to establish the European stability mechanism (ESM), which paves the way for the creation of a €500-billion rescue fund. The euro reached a four-month high and European stock markets rose after the court imposed conditions that were less burdensome than German parliamentarians and other ESM supporters had feared.

The ESM can now start up next month and become fully operational by the new year, despite the warnings of analysts who say it will not work. The ruling was considered one of the most important in the court's 61-year history.

A key condition attached to the ruling means that Germany's liabilities will be capped at €190-billion. But the fact that the Bundestag and Germany's ESM representative can override the limitation led some observers to say it was a bluff, introduced to assuage the concerns of German taxpayers whose frustration at the prospect of having to bail out indebted south European countries indefinitely has been on the rise.

A poll before the ruling showed that 54% of Germans wanted the court to block the ESM, amid growing fears that Germany is ceding too many powers to European institutions. The court was petitioned by 37 000 Germans arguing that the ESM was anti-constitutional.

The ruling is a breakthrough for Merkel and allows the go-ahead of the two-pronged approach she favours of both bailouts and budgetary discipline in the form of the ESM and the fiscal pact. She said the decision sent a strong signal of Germany's commitment to Europe, and was positive news for German taxpayers, who she said had been provided with certainty.

"This is a good day for Germany, a good day for Europe," she told the Bundestag. "We haven't yet overcome the crisis, but we have achieved our first steps."

Significance of the decision
Frank-Walter Steinmeier, leader of the opposition Social Democrats, expressed his relief that the ESM – whose creation had been substantially delayed by the Constitutional Court's deliberations – could now start to work. "The significance of this decision for the future of Europe cannot be underestimated," he told the Bundestag.

Neil Prothero, of the Economist Intelligence Unit, said the decision would come as a relief to policymakers across the eurozone. "A decision against the ESM would have thrown the region's crisis response strategy into disarray," he said.

But Gunnar Beck, an EU analyst at London's School of Oriental and African Studies, called the decision "a completely absurd judgment from a legal point of view", because it meant Germany's liability was fixed "unless it is decided otherwise, which means there's no limit to it".

He was gloomy about the long-term effects of the decision, predicting that the markets' enthusiasm would not last. "In the short term the market will be booming, but in the long term this means unending horror. Germany is locked in now and it means that if the [European Central Bank] buys unlimited bonds, Germany's liability is unlimited as well," he said. "Germany is like a bank that has lent too much to its biggest client so that it has to continue lending until the client goes bust".

The court had been under huge pressure not to torpedo the ESM, amid fears that it would cause the destruction of the euro and have a chaotic effect on the global economy. Andreas Vosskuhle, the court's president, said the economic and political consequences of delaying the law's introduction were "almost impossible to calculate reliably".

Despite repeated claims of the court's independence, there have been strong suggestions of at least one high-level meeting between the government and the court, reports about which led to speculation that the two bodies might have worked closely on a face-saving solution.

A little light relief amid the gravitas was offered by a slip of the tongue by Vosskuhle, who called the petitions to block the ESM "justified" before changing it to "unjustified" after being corrected by a colleague, as peals of laughter filled the courtroom. – © Guardian News and Media 2012

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