Markets await result of German court ESM ruling

The German constitutional court is expected to rule today on whether the European Stability Mechanism is in line with the constitution.

If it rejects the EU rescue fund, it could throw the markets into turmoil and ratchet up the euro crisis that has calmed in recent days after the ECB announced bond buying.

Ireland is hoping for a swift implementation of the ESM fund as it will have the power directly to capitalise banks, and the Government is hoping it will lend €62bn to cover the money used to restructure banks.

The court turned down a last-minute bid to delay the case over the European Stability Mechanism yesterday when it rejected complaints by politician Peter Gauweiler about the ECB’s bondbuying programme.

Whether the court will consider a further delay until the European Court of Justice rules on the case taken in Dublin by independent TD Thomas Pringle was not clear. Some of those who have taken the case to the German Constitutional Court, including Markus Kerber, have said the decision should be delayed until the European court has ruled.

The Supreme Court has asked the ECJ to consider three issues: 1) Is the EU Council decision of March 25, 2011, to amend article 136 of the TFEU valid and does it violate treaty or EU law principles? 2) If the decision of March 25, 2011, is valid, is a member state entitled to join the ESM before the decision comes into force? 3) Are the terms and operation of the ESM Treaty compatible with the principles and provisions of the EU Treaties?

Germany has not ratified the ESM treaty but if the judges decide it can’t join, then the fund is unlikely to become operational.

German finance minister Wolfgang Schaeuble told students last week he was confident the ESM would be approved and that he sees “no constitutional issues” with the fund.

Franz Mayer, a law professor at Bielefeld University, said he expected the court to ratify the ESM but that “there will probably be some strings attached.

“The bigger issue than the actual ruling is what extra language the court will add to the reasoning on where the limits are in the future. The markets seem to be quite afraid the judges may spoil certain options for the future, like collectivisation of debt within the euro zone,” Prof Mayer said.

At this stage, the judges only have to decide whether to halt ratification of the treaties while reviewing the suits more closely.

The judges may make parliament take steps to assess future liabilities, which could include taking into account how much the ECB’s new bond purchase programme may cost German taxpayers, said Christoph Ohler, a professor of European law at Jena University.

“Court cases are about things in the past, and the court isn’t likely to interfere with what has been decided by the lawmakers,” said Professor Ohler.

Additional reporting by Bloomberg