Germany’s highest court repudiated Italy’s push to grant the permanent euro-area rescue fund a banking license, saying it would violate the European Union’s basic law.
In upholding the 500 billion-euro ($646 billion) European Stability Mechanism, Germany’s Federal Constitutional Court in Karlsruhe today disputed the fund’s ability to borrow from the central bank, a move advocated by Italian Prime Minister Mario Monti.
“Borrowing by the ESM from the European Central Bank, alone or in connection with the depositing of government bonds, would be incompatible with the prohibition of monetary financing entrenched” in EU treaties, the court said. It “can only be taken to mean that it does not permit such borrowing operations.”
That finding marked a victory for German Chancellor Angela Merkel and her allies in Finland and the Netherlands, who have opposed allowing the ESM to expand its power by tapping central bank funds. Merkel and Monti clashed at a joint press conference on Aug. 29 over the matter.
“Some things that aren’t possible today under current conditions could become possible tomorrow,” Monti said to reporters after Merkel, at his side, ruled out a banking license for the ESM. “If there isn’t consensus for a certain instrument, alternative instruments can be found.”