Markets heaved a sigh of relief, stock prices rallied – never before has a decision of Germany’s Constitutional Court had such an impact on the world’s economy.
Europe’s bailout fund, the European Stability Mechanism (ESM), got the all clear today when the court in the city of Karlsruhe ruled that the ratification of the ESM treaty was in line with the German constitution. The ruling had been awaited nervously by governments and investors around the world, since a rejection of the ESM by Germany would have thrown the eurozone, already reeling from the biggest debt crisis since its creation in 1999, into even greater turmoil.
“This is a good day for Germany, and a good day for Europe,” Chancellor Angela Merkel told parliament after the ruling. “We are sending a strong signal that we are committed to the eurozone project.”
The bailout fund with its planned volume of €500 billion is the eurozone’s most important weapon in the fight against the sovereign debt crisis. In the past three years Greece, Ireland, and Portugal already had to ask the EU and the International Monetary Fund (IMF) for financial support. While major eurozone economies like Spain and Italy are finding it increasingly difficult to borrow fresh money from reluctant investors, the existence of a bailout fund with a lot of “firepower” is seen as necessary to convince financial markets and institutions around the world that the euro is here to stay.
But it is the strength of that firepower which has caused heated debate and led to the biggest case in the history of Germany’s Constitutional Court. More than 37,000 plaintiffs had asked for an injunction to stop Germany from ratifying the ESM, which has been created to replace the temporary bailout fund EFSF. They are concerned that non-elected politicians or civil servants could make far-reaching decisions on the amount that member states are paying into the fund or the way that money is being used.
These concerns seem not unfounded. Christine Lagard, director of the IMF, has in the past insisted that the bailout fund needed to be stocked up to a trillion euros in order to be effective. Talk of such sums set alarm bells ringing in Germany.
“We do our bit to help, but the fact is that the eurozone’s bailout policies are fundamentally wrong,” says Klaus Peter Willsch, member of parliament for Chancellor Merkel’s governing Christian Democrats. He belongs to the growing number of MPs who are skeptical about Merkel’s resolve to safeguard German interests. Under the current treaty Germany would be liable for €190 billion of the ESM’s €500 billion.
And while the Karlsruhe court ruled that this treaty was not a violation of the German Constitution, it also stated that any expansion of the ESM’s volume or brief in the future needs to be sanctioned by the parliament in Berlin.
It is this restriction that makes people like Michael Efler feel like a winner, even if he just lost a case. Mr. Efler, spokesman for the civil rights group “More Democracy,” is one of the 37,000 plaintiffs who brought the case, trying to stop Germany as the last eurozone member to ratify the ESM. “We feel that more and more power is transferred from national parliaments to Europe. And even if the court today gave the OK to the bailout fund, they imposed a strong limit to the amount of power that this or any future German government can delegate to Brussels.” That, in Efler’s eyes, is a victory.
But most of all it creates a bit of calm that the eurozone desperately needs. “The markets will be happy for a while at least,” says Ingolf Pernice, professor of constitutional law at Humboldt University in Berlin. “It’s only one step in solving the euro debt crisis, but it’s an important one.”