German court OKs euro rescue fund

Germany's top constitutional court Wednesday rejected efforts to block a permanent eurozone rescue fund, handing a victory to Chancellor Angela Merkel, who championed the bailout facility.

The Federal Constitutional Court in Karlsruhe dismissed motions that sought to block the European Stability Mechanism, while ruling that Germany's $240 billion contribution cannot be increased without legislative approval.

The court said Germany can ratify the ESM if it includes binding caveats that it won't be forced to assume higher liabilities without its consent.

"We are an important step closer to our goal of stabilizing the euro," German Economy Minister and Vice Chancellor Philipp Roesler told reporters in Berlin after the ruling. "It has always been the goal of this government [to establish a] clear limit and to include parliament in all important decisions."

The legal challenge to the ESM and a fiscal pact, designed to impose budget discipline on European Union members, delayed efforts by Merkel and other eurozone policymakers to stem the region's debt crisis.

Much of the effort to resolve the crisis hinges on the permanent ESM, which will succeed the temporary European Financial Stability Facility. Though the ESM will be the main rescue vehicle once it is up and running, the EFSF's remaining funds will be available until mid-2013 to ensure a fresh lending capacity of 500 billion euros.

The bailout fund would work in tandem with the European Central Bank's bond buying to lower yields for countries like Spain and Italy.

The ruling is "another big step toward defusing the euro crisis," Holger Schmieding, chief economist at Berenberg Bank, said in a note to clients. Though the debt crisis isn't over yet, a "gradual return of confidence could enable the German economy to rebound by the end of the year from its current stagnation and the eurozone to start expanding gradually in early 2013."

Last week, Mario Draghi, president of the ECB, said it was ready to buy unlimited quantities of short-dated government bonds of nations signed up to rescues. While rejecting a last-minute request for an emergency injunction over the Draghi announcement, the court said it would review a challenge to the ECB bond-buying programs in the remainder of the cases, including possible oral arguments before year's end.

The ESM treaty must be interpreted as banning the fund from borrowing from the ECB or depositing bonds as collateral, the court said, because EU law does not permit the central bank to buy government bonds on the secondary market with the intention of financing member-state budgets independently of the capital markets.

Wednesday's cases were filed after German lawmakers approved the ESM and the fiscal pact, a deficit-control treaty designed to impose budget discipline on European Union members. About 37,000 people signed up to endorse a constitutional complaint filed by the political group Mehr Demokratie e.V. Other plaintiffs included the opposition party Die Linke, as well as Peter Gauweiler, a lawmaker from Merkel's CSU Bavarian sister party.

"We were hoping for a tougher critique of the treaties," Roman Huber, managing director of Mehr Demokratie e.V., said in a statement on the group's website. "In the long run, a stable EU can't be made without parliamentary participation and without the citizens."

Those filing the court challenge argued that the crisis-fighting legislation transfers constitutionally mandated authority from German lawmakers and undermines democratic rule.

For Wednesday's ruling, the judges chose six cases and had to decide only whether to halt ratification of the treaties while reviewing the suits more closely. On July 10, the German judges heard oral arguments from groups challenging the viability of the EU's fiscal pact and the ESM, which both houses of parliament approved with two-thirds majorities June 29.

Previously, the court cleared each step of European integration, including last year's Greek bailout.