More Relief for Euro as German Court Gives OK to Bailout Fund

Second important decision in the euro's favor in less than a week sparks rally in stocks and on currency markets

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German Chancellor Angela Merkel gives a speech during a session of the lower house of parliament on Sept. 12, 2012 in Berlin, just after the Second Senate of the Federal Constitutional Court issued their ruling on the legality of the eurozone's bailout fund and fiscal pact for greater budgetary discipline.

Germany’s highest court gave the euro its second big boost in less than a week with a ruling that a planned new European bailout fund for economies in distress does not breach Germany’s constitution.

The decision means that Germany can now complete ratification of the new 700 billion euro fund, the European Stability Mechanism, and the fiscal treaty that accompanies it, essentially clearing the way for implementation of the most comprehensive safety net so far for the single currency.

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The ruling follows the announcement on Sept 6 by the European Central Bank that it has agreed to buy up sovereign bonds of European countries in difficulty once they have agreed to pursue a rigorous reform course. Taken together the two decisions provide some much-needed breathing space for the beleaguered euro, which is used by 17 European Union nations.

The decision was closely watched by government and financial markets and the outcome was anything but a foregone conclusion. The ruling sparked a rally in European stocks and the euro also rose against other currencies.

The pressure on the euro hasn’t simply evaporated, however. The Greek government is still struggling to satisfy its European partners that it will implement the tough austerity measures it agreed to as the price of a financial rescue. It remains unclear whether Spain will sign up for a full rescue, and if it doesn’t how it will manage to muddle through the next few months. And in the world of professional economists, enormous skepticism remains that the drastic debt-reduction programs that have become the new economic orthodoxy in the euro-zone are actually what’s needed at a time when the entire continent, including Germany, is tipping into recession. Among those vigorously contesting this course of action are Nobel laureate Paul Krugman and Daniel Cohen, a leading French economist, who says that it makes no sense to cut spending sharply at a time of negligible or no growth.

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Still, the German constitutional court decision brought considerable relief to policymakers around Europe, especially German Chancellor Angela Merkel, who has emerged as the key figure in the euro crisis. The court, based in Karlsruhe, has a recent history of seeking to limit German exposure to the problems of its European neighbors and define more clearly the boundaries of sovereignty. More than 30,000 Germans petitioned the court to strike down the bailout fund and the fiscal treaty, both of which have been approved by the German parliament. Opponents argued that it would expose Germany to unlimited liability.

In throwing out the injunctions, the court nonetheless stipulated that Germany should not be liable for more than the 190 billion euros that is its agreed share of the total bailout fund, unless parliament expressly approves an increased ceiling. (Some 22 billion euros of the total is paid-in capital; the remainder takes the form of guarantees). The court is also insisting that the fund’s managers needs to communicate clearly with the German parliament about their decisions, a stipulation that contradicts some of the confidentiality provisions in the official documents. Guntram Wolff at the Bruegel think tank in Brussels estimates that this could potentially delay the final implementation of the fund. However Jean-Claude Juncker, the Luxembourg prime minister who heads the Eurogroup, announced that he will convene a meeting of the Stability Mechanism’s governors already on Oct. 8, and that the new fiscal treaty would take effect in 2013.

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