Euro at four month high after German bailout ruling

Germany’s Constitutional Court gave a green light yesterday for the country to ratify Europe’s new bailout fund, boosting hopes that the single currency bloc is finally putting in place the tools to resolve its three-year old debt crisis.

In an eagerly anticipated ruling that has had investors on tenterhooks for months, the court in the southern city of Karlsruhe insisted the German parliament be given veto rights over any increase in Berlin’s contribution to the €700 billion European Stability Mechanism (ESM).

But the strings it attached to its endorsement of the ESM and a separate European pact on budget rules were less onerous than many had feared. The euro shot up to a four-month high against the dollar and global stocks rose to a five-month peak.

“This is a good day for Germany and a good day for Europe,” German chancellor Angela Merkel said in a speech to parliament.

Germany is the only country in the 17-nation eurozone that has not ratified the ESM, an important tool to stem the crisis that has forced bailouts of Greece, Ireland and Portugal, and is now threatening big countries like Italy and Spain.

Had the court upheld complaints against the rescue fund by thousands of German plaintiffs it would have delayed its implementation or even doomed it, dealing a devastating blow to policymakers and sending markets reeling.

European Central Bank (ECB) president Mario Draghi announced plans last week to buy unlimited amounts of government bonds issued by stricken euro states like Spain and Italy in order to reduce their borrowing costs.

That plan fuelled optimism in the markets, but it was contingent on the ESM coming into force. Following yesterday’s ruling, German finance minister Wolfgang Schaeuble said he expected the rescue fund to be operational within weeks.

Jean-Claude Juncker, who heads the group of eurozone finance ministers, set a first meeting of the ESM’s board of governors for Oct 8, another sign of optimism that the fund will soon be up and running.

“The eurozone has got over another hurdle, and slowly but surely, the region is getting more stable, less risky,” said David Thebault, head of quantitative sales trading at Global Equities in Paris.

The court set two main conditions. First, German liability in the rescue fund must be limited to €190bn, the share set out in the current ESM treaty, and any increase in that amount will require prior approval by the Bundestag lower house of parliament, the court said.

Second, the court said a clause in the ESM treaty which seeks to keep decisions of the fund confidential “must not stand in the way of the comprehensive information of the Bundestag and of the Bundesrat (upper house)”, meaning both chambers would have the right to be consulted on the ESM’s activities.

The German government may now have to incorporate the court’s reservations in some form of addendum or protocol to the ESM treaty, although this is not expected to take much time.

Reuters