German court paves way for European stability fund

Vidya Ram London | Updated on March 12, 2018 Published on September 12, 2012

German Parliament to play key role in future developments

Germany’s Federal Constitutional Court has cleared the way for the creation of the European Stability Mechanism, the region’s much-delayed €500-billion bailout fund, as well as the fiscal compact imposing greater budgetary discipline across the region.

In a landmark decision eagerly awaited by a jittery market, the court in Karlsruhe rejected an application for an injunction on the ESM, allowing President Joachim Gauck to sign the necessary legislation.

The legal challenge had delayed the introduction of the fund from June and left the European Financial Stability Facility, with remaining resources of around €200 billion, as the region’s only source of funds for bailing out beleaguered nations.

The ruling was not without caveats, though these were in line with expectations and essentially gives the German parliament, the Bundestag, a key role in any future developments. Germany’s liability is capped at €190 billion, the figure previously approved by the Bundestag.

Any further increases will have to be approved by the parliament, which must be kept abreast of all developments within the fund. These conditions must be met for Germany to be able to ratify the ESM.

The ruling is a major victory for Chancellor Angela Merkel, who has pushed for the ESM despite considerable public opposition in Germany to the proposals, and in particular any increases to Germany’s already sizable liability to the Euro Zone crisis.

It was a “good day for Germany and a good day for Europe,” Merkel told the Bundestag on Wednesday.

Jean-Claude Junker, Chairman of the Euro Group of Finance Ministers, said that the first meeting of the ESM’s board of governors would take place on October 8.

Holger Schieding, Chief Economist at Berenberg Bank, said that the verdict, combined with other recent developments including the ECB’s new unlimited bond buying programme made it “even more likely than before that future waves of turmoil will be less vicious than the ones before.”

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Published on September 12, 2012
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