Germany's top court endorses rescue fund

THE EUROPEAN Stability Mechanism (ESM) cleared a final hurdle yesterday when Germany’s highest court gave its qualified backing for the euro zone’s permanent bailout fund.

Constitutional judges in Karlsruhe said, in a preliminary ruling, it was “highly likely” that the ESM complied with Germany’s Basic Law, but ordered extra safeguards to limit financial liability.

The court dismissed injunctions claiming the ESM presented a risk of unlimited liability and would thus undermine Germany’s financial sovereignty now and in the future.

Yesterday’s ruling allows German president Joachim Gauck to sign the ESM Bill into law, completing ratification of the bailout treaty among euro zone members.

The court withheld judgment until its final ruling on a last-minute injunction over whether European Central Bank bond-buying was compatible with German law.

Chancellor Angela Merkel welcomed the ruling as a “good day for Germany and for Europe”.

“Once again Germany is sending a strong signal to Europe and beyond that it is meeting its responsibilities as the biggest economy and trusted partner in Europe,” she told the Bundestag.

Finance minister Wolfgang Schäuble said the ruling cleared the way for a “rapid ratification” of the ESM treaty.

The European Stability Mechanism was established by EU leaders as a permanent bailout fund, replacing its temporary predecessor, the EFSF, which will cease to operate in mid-2013.

The ESM will have total capital of €700 billion but may loan up to €500 billion. German liability to the fund, based on its 27 per cent stake in the European Central Bank, would be a €22 billion in capital and further guarantees worth almost €170 billion.

Court president Andreas Vosskühle said his court’s priority – guardianship of the German constitution – remained valid in the ongoing crisis. “Europe only has a future as a democratic legitimated community of laws,” he said.

Ahead of its final verdict, expected early next year, the court ordered two safeguards against “uncertainties” in the ESM treaty before German participation could go ahead.

First, it ordered a binding guarantee stipulating that Germany would never contribute more than the € 190 billion mentioned in the treaty. This threshold could only be crossed, the court said, if Germany’s ESM governor – the Berlin finance minister – and the Bundestag agreed to do so.

Second, Karlsruhe judges said the ESM’s confidentiality rule for its governors did not supersede German MPs’ constitutional right to know what they were agreeing to finance. This secrecy clause must be lifted for Germany’s ESM governor to allow him inform parliament of the ESM’s activity – in line with Germany’s constitution.

The court said it would not settle for political assurances on these points but “binding guarantees under international law”.

Mr Schäuble said Berlin would complete these tasks to ensure the ESM can be “ready for work within weeks”.

This demand for “binding guarantees under international law” was described as a “legal sensation” by a leading complainant, Bavarian MP Peter Gauweiler.

“The constitutional shortcomings of the ESM treaty are so grave that the court, for the first time . . . limited the application of the treaty not just domestically but in international law,” he said.

Long-time court watchers suggested this was a logical demand by Karlsruhe, given the ESM is not yet active. “Otherwise Germany’s partners might disagree on the interpretation later. For Karlsruhe’s reading of the treaty to be valid, Germany’s partners need do nothing,” said Prof Christian Pestalozza, law professor at Berlin’s Free University. “For reasons of solidarity it might be nice if EU leaders issued a statement saying they share the Karlsruhe view on ESM liability and information for parliaments.”

Controversy has accompanied Germany’s ratification of the bailout fund, with cases taken by Mr Gauweiler, a backbencher in Dr Merkel’s government, and the opposition Left Party. A further case, taken by “More Democracy”, was endorsed by 37,000 citizens.