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In victory for Merkel, German court backs euro rescue fund

Source : BUSINESS_STANDARD
Last Updated: Thu, Sep 13, 2012 03:50 hrs

Germany’s 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 euro 190 billion, 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.

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 was whether the new fund would weaken the German Parliament’s right to control the spending of German taxpayers’ money.

The fund, with its euro 500 billion, 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 am 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.

The court earlier approved a temporary bailout fund, known as the European Financial Stability Facility. But at that time, the court’s president, Andreas 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 ESM, 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 recapitalisation 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 atomised 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 waiting to see whether the court granted the injunction or not.

Opposition to the ESM 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 ECB 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 ECB's plans to buy bonds.

“The ECB and them together is quite something and it would go a long way,” said Wolff, the expert at Bruegel. “I think in the short run it will certainly help, the ESM, 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 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,'’ Heinen, the expert at Deutsche Bank, 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.”

Melissa Eddy reported from Berlin.


© 2012 The New York Times News Service



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