Chancellor Angela Merkel’s court victory on policy for saving the euro was hailed by southern Europe as well as her northern allies as German bailout critics failed to stop the joint currency’s permanent rescue fund.
With an extension of Greece’s bailout still undecided and Spain holding out on seeking a sovereign rescue, today’s German constitutional court verdict avoids worsening the debt crisis as it approaches its third anniversary. It also hands Merkel ammunition against domestic opponents who see German taxpayers’ money at risk in the name of a united Europe.
Italian Prime Minister Mario Monti, who has introduced budget austerity measures to keep the crisis from engulfing the euro area’s third-largest economy, said the court decision is “excellent news.” Spanish Deputy Economy Minister Fernando Jimenez Latorre called it “very positive.”
Stocks and Spanish and Italian bonds rallied after the ruling, while the euro rose to a four-month high. The single currency climbed 0.4 percent to $1.2901 at 4:17 p.m. in Berlin. The Stoxx Europe 600 Index rose 0.3 percent.
The ruling is “another big step towards defusing the euro crisis,” Holger Schmieding, chief economist at Berenberg Bank, said in a note to clients. While the debt crisis isn’t over, a “gradual return of confidence could enable the German economy to rebound by the end of the year from its current stagnation and the euro zone to start expanding gradually in early 2013.”
The court in the southern city of Karlsruhe ruled unanimously that German participation in the ESM is constitutional, while saying the government must secure binding caveats that its 190 billion-euro ($245 billion) contribution won’t be raised without its consent. Further backing Merkel, the eight judges said the European Central Bank can’t finance the permanent fund, the European Stability Mechanism, and endorsed her European deficit-control treaty.
“This is a good day for Germany and it is a good day for Europe,” Merkel said in a speech to lower-house lawmakers in Berlin. “Today, Germany once again sends a strong signal to Europe and beyond: Germany is resolutely fulfilling its responsibilities as the biggest economy and trusted partner in Europe.”
Waiting for the German court decision held up efforts by euro-area governments to stem the financial turmoil that has rippled to the U.S. and China and spawned a north-south rift between Europe’s creditor and debtor countries.
Once set up, the Luxembourg-based ESM will form a crisis-fighting tandem with the European Central Bank after ECB President Mario Draghi offered to buy sovereign bonds on the secondary market to reduce borrowing costs for countries such as Spain and Italy. Spain’s 10-year benchmark bond fell to 5.57 percent from 5.69 yesterday, compared with 7.17 percent before Draghi’s announcement.
In the Netherlands, one of four euro-area countries retaining a top AAA credit rating, voters cast ballots today in parliamentary elections that may determine whether the country stays behind Merkel’s austerity-first approach.
Finnish Finance Minister Jutta Urpilainen, whose country also holds a AAA rating, said the court ruling in Germany lifts uncertainty about the ESM’s future.
The ESM’s governing board will hold its first meeting on Oct. 8, said Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-area finance ministers. The legal ruling is “part of our comprehensive strategy to bolster the outlook for fiscal sustainability and growth in the euro area,” he said in an e-mailed statement.
North vs South
North-south praise for the German government’s victory in the courts belies a disparity over Merkel’s wider approach to crisis fighting revealed in an opinion poll released today in Brussels.
Merkel’s handling of the debt crisis scored approval ratings of 74 percent in the Netherlands, 64 percent in France and 63 percent among German voters. Disapproval was at 63 percent in Italy and Spain and 61 percent in Portugal.
“Some worrying trends emerge, from the deep differences between northern and southern European countries to the lack of trust in governments,” said Sergio Chiamparino, chairman of Compagnia di San Paolo, which co-sponsored the poll with the German Marshall Fund of the United States.
Attention is focused on Spain, the euro area’s fourth-largest economy, after Prime Minister Mariano Rajoy sought aid for the country’s blighted banks. He told Parliament in Madrid today that it’s still not clear whether Spain needs a full sovereign bailout as the ECB’s crisis plan has cut borrowing costs.
Rajoy’s hesitation prompted a warning from Germany. The Spanish government can’t bet on avoiding conditions if he seeks more aid from Europe’s bailout funds, said Michael Meister, a senior lawmaker from Merkel’s Christian Democratic Union party.
“It’s crystal clear that if Spain asks for further help it cannot escape conditionality entirely,” Meister, the CDU’s whip and finance spokesman, said by phone.
Much of the effort to resolve the crisis hinges on the ESM, which will succeed the temporary European Financial Stability Facility. While the ESM will be the main rescue vehicle once it’s up and running, the EFSF’s remaining funds will be available until mid-2013 to ensure a fresh lending capacity of 500 billion euros.
German President Joachim Gauck, who has withheld signing legislation on the ESM and the so-called fiscal pact pending today’s ruling, is studying the court’s decision and will decide “as soon as possible,” his office said in a statement.
Monti, who has said Italy won’t need a bailout, said the German court’s caveats to Merkel aren’t a hindrance to putting the permanent aid fund into force.
“I don’t think this limitation signals an unexpected brake on the process of stabilizing the markets,” Monti said. “I think the sentence only says that to increase the total commitment of Germany the two houses of parliament have to intercede. That doesn’t seem surprising to me.”