Karlsruhe, Germany – Germany’s Federal Constitutional Court on Wednesday gave Chancellor Angela Merkel a significant victory in her bid to master the debt crisis that has buffeted the continent for years and endangered its common currency, granting approval to one of the key pillars of her strategy.
With the ruling, the 17 countries of the euro zone will be able to move ahead with the establishment of the European Stability Mechanism, something like a continental version of the International Monetary Fund. The mechanism will handle bailouts and work in tandem with the European Central Bank to buy the bonds of countries such as Italy and Spain that are straining under high interest rates.
The court ruled that Germany could proceed with its contribution to the mechanism but set certain conditions, including a requirement for parliamentary approval of any increase in the agreed German contribution of 190 billion euros, or about $240 billion. While unlikely to still the crisis entirely, a rejection could have unleashed new waves of instability on the financial markets and thrown the fitful march toward European integration into question as the architects of the rescue rushed back to the drawing board.
“Once again, Germany today sends a strong signal out to Europe and the world beyond,” Ms. Merkel, said in an address to Parliament that was pushed back to allow her to react to the court’s ruling. “Germany is decisively true to its responsibility in Europe as the largest economy and a reliable partner,” Ms. Merkel said
The court ruling cheered investors, with the euro Stoxx 50 index of euro zone stocks rising 1.1 percent in morning trading to its highest point since March. The euro rose to $1.2885, its highest since May. Trading in index futures showed Wall Street stocks poised to gain at the opening bell.
In explaining the decision, Andreas Vosskuhle, the court’s president, said, “No one can say with certainty which measures will be best for the Federal Republic of Germany and the future of our united Europe in the current crisis.” As such, it was “first and foremost those directly elected by the people,” who should decide, he said.
Underlining the powers of Germany’s legislators, he said that the “elected lawmakers of the German Parliament, as representatives of the people, must retain the control over decisive budgetary questions.”
The court was not formally ruling on the constitutionality of what is intended as a long-term fund to bail out countries in financial trouble, but on requests to block the German president from signing the bill into law.
The question before the court was whether the new fund would weaken the German Parliament’s right to control the spending of German taxpayers’ money.
The ruling dealt a clear blow to euroskeptics in Germany who had tried to block the country’s contributions, citing concerns that it would allow German taxpayers’ money to be spent without their approval. Another judge, Peter Huber, rejected this idea, saying that the fund “does not hand over rights of budgetary decisions to any other actors.”
Mr. Vosskuhle said the court recognized the E. S. M and the fiscal pact as part of efforts by the German government to overcome the sovereign debt crisis at the European level, but underlined the need for such measures, nevertheless, “to be tied to legal, and democratic” processes.
“One thing is clear: Only as a democratically legitimized community under the rule of law does Europe have a future,” Mr. Vosskuhle said.
In a moment that pointed to the pressure surrounding the announcement of Wednesday’s ruling, Mr. Vosskuhle stumbled at one point as he read out the ruling, saying that the court had found the challenges to be “founded” instead of “unfounded.”
He quickly corrected his slip of the tongue and said amid laughter in the courtroom, “You can see it was an intensive discussion.”
Guido Westerwelle, Germany’s foreign minister, praised the ruling as an “intelligent decision in the pro-European spirit of our constitution.”
The fund, with its 500 billion euros, is intended to buoy struggling countries and help protect the common currency, an impossible mission without Germany, the European Union’s largest economy.
The hour of reckoning for the euro seems to arrive again and again, like clockwork, whether in a decisive vote in the Slovakian Parliament, a tough negotiation with Finland over its contribution to a bailout or the wee-hours summit meetings among European leaders in Brussels.
The crisis has served as a crash course in the messy, circuitous nature of European decision-making. The winding path of the euro crisis, with its headspinning array of overlapping authorities found its way once again to this city in southwestern Germany. Indeed, spectators might be forgiven for a sense of déjà vu: little more than a year ago, the court ruled that bailouts of fellow euro zone member states did not violate the German constitution, known as the Basic Law.
But now, with the court’s evident support for the permanent bailout fund, Europe is moving beyond its common monetary policy into encouraging its core group of countries to develop a more unified fiscal policy as well.
“We are creating an institution that will have its own dynamics, become more and more powerful,” said Guntram B. Wolff, the deputy director at Bruegel, a think tank in Brussels. “This would be the start of a new and stronger European core.”
The eight judges, in their red robes and caps, emerged at 10 a.m. to issue their ruling. But the court ruling in this southwestern German city was only one of several significant events in Europe on what some here are calling “Super Wednesday.” Voters went to the polls in the Netherlands to elect a new Parliament. The European Commission also was presenting its plans Wednesday to shift banking supervision from individual countries to the European Central Bank, known in Brussels-speak as a banking union. Applause broke out at the European Parliament in Strasbourg, France, when news of the court’s decision broke.
The court earlier approved a temporary bailout fund, known as the European Financial Stability Facility. But at that time, Mr. Vosskuhle warned that the ruling was not a “constitutional blank check for additional rescue packages” and required the approval of Parliament’s budget committee before money could be made available for future bailouts of European countries.
Without the E.S.M., there is little margin of error. The stability facility has already promised much of its available funds to Greece, Ireland and Portugal, as well as the planned recapitalization of Spain’s banking sector. Even buying Spanish bonds would quickly exhaust its reserves, much less trying to help Italy with the cost of financing its enormous debt load.
Part of the learning curve for financial markets has been to understand that the atomized decision-making and political responsibility has to be balanced against a deep commitment among European elites to the project of integration, and a willingness to find workarounds whenever the edge of the abyss approaches.
The Bundestag and the Bundesrat ratified the permanent stability fund with two-thirds majorities in June but it has not been signed by President Joachim Gauck, who was awaiting the ruling.
The ruling clears the way for Mr. Gauck to sign the agreements, making Germany the final nation to ratify the E.S.M. Mr. Gauck’s office said Wednesday that the president wanted to sign as quickly as possible but that no date has been set.
Opposition to the E.S.M. has brought together the right, which wants to guard German sovereignty and the rights of the national Parliament, with the far left, which opposes the bailouts. The ruling came in response to a request from German lawmakers, academics and some 37,000 citizens who signed a complaint to issue a temporary injunction against Germany paying into the fund.
The judges listened to arguments at a hearing in July. The constitutionality under Germany’s Basic Law was not being decided. An injunction and stern signal by the court could have sent the euro rescue fund back to the drawing board.
The European Central Bank has pledged to buy government bonds in unlimited amounts to keep the borrowing costs for troubled countries down. The plan has been greeted in Germany as everything from an unfair pooling of risk to a reckless turn to the printing presses to solve the problems of debtor nations by inflating away their liabilities.
But the E.C.B. plan to buy government bonds was predicated on cooperation with the stability mechanism. A ruling against Germany’s contribution to the fund would hae thrown into question not only the euro zone’s mechanism but also the E.C.B.’s plans to buy bonds.
“The E.C.B. and them together is quite something and it would go a long way,” said Mr. Wolff, the expert at Bruegel. “I think in the short run it will certainly help, the E.S.M., but I don’t think it will be enough.”
The Germans are not alone in their attitude toward inflation and bailouts. Another country where skepticism of the costs of holding the currency together has risen is the Netherlands, where voters are deciding on a new government.
For Ms. Merkel, rejection by the court would have been a severe political blow. Her coalition has been weak and fragmented at home. Her leadership in Europe has helped her clamber above the domestic political fray, even if many are leery of the growing financial commitments the bailout requires.
The Federal Constitutional Court is a powerful institution, one that surveys have shown for years carries an unusual degree of trust among voters. The court plays a significant role in Germany, not only because of its official powers but also because of the trust and high standing it enjoys with the German public.
The court in Karlsruhe has evolved into the destination for protest and debate in Germany over European integration. This reflects the lack of representation in Parliament for euroskeptic views.
“People know the numbers, know the risks in the budget area,” Nicolaus Heinen, a Europe expert at Deutsche Bank Research, said. “Risks have become more and more political. “That will be the challenge for years or even decades, to reconcile the opinion of the populations of the European countries of what will be the future of European integration.”
This story, “German Court Backs Euro Rescue Fund,” originally appears at the New York Times News Service.
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