Wednesday

27th Jan 2021

Sighs of relief as German court approves bailout fund

  • The euro climbed to a four-month high against the dollar on the Karlsruhe ruling (Photo: Valentina Pop)

Markets and EU politicians breathed sighs of relief as Germany's top court rejected challenges brought against the eurozone's upcoming bailout fund, expected to launch in October. Any increase in Berlin's contribution will need parliamentary approval, however.

"This is a good day for Europe and a good day for the euro," European Parliament chief Martin Schulz said as the common currency hiked to a four-month high against the US dollar and European shares climbed on the ruling pronounced in Karlsruhe.

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The verdict rejected the request to block ratification of the two treaties establishing the European Stability Mechanism - a €500bn strong bailout fund for struggling eurozone countries - and the so-called fiscal compact on budget discipline, a treaty signed in March by all EU countries except Great Britain and the Czech Republic.

This means the German president can complete the ratification process, allowing for the ESM to come into force in October, after three months of delay.

The eight judges will deliver a complete verdict in December on all the complaints, which compromise some 37,000 plaintiffs.

But they have requested that a €190bn cap be put on Germany's ESM contribution (most of which represents liabilities, not actual cash). If increased, the German Parliament (Bundestag) needs to approve it first.

Members of the Bundestag also need to be informed about what the ESM does with the money, despite a confidentiality agreement signed by ESM board members, which include German finance minister Wolfgang Schaeuble. The principle of democratic accountability has to be upheld, the court said.

Eurogroup chief Jean-Claude Juncker "took note" of the decision and said he plans to convene the first meeting of the ESM's board of governors on 8 October in Luxembourg. Germany is the last country still to ratify the ESM.

As for the treaty on fiscal discipline, it will not come into force earlier than 1 January 2013, Juncker said.

But Guntram Wolff, an expert with the Brussels-based economic think-tank Bruegel, estimates that the Karlsruhe verdict may take longer to implement, because the two demands - the €190bn cap and the confidentiality issue - need to be "binding in international law".

"My first reaction would be that this probably cannot be done by just agreeing in the German implementation law that the conditions are met. It may require changes in the ESM treaty or a new side treaty to the ESM. So my suspicion is that it will significantly delay the implementation of the ESM," Wolff wrote in an emailed statement.

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