German court says yes to euro bailout, but this crisis isn’t over

Sep 12, 2012

Euro bailout fund gets the go-ahead, but judges put limit on Germany’s contribution

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GERMANY’S constitutional court has thrown out an attempt to prevent the country from contributing to the eurozone bailout fund, much to the relief of investors. However, the Federal Constitutional Court did rule that Germany could not give more than €190 billion to the European Stability Mechanism.

Any increase in this maximum contribution would have to be agreed by the German parliament, the judges ruled.

The news means the temporary fund, which was used to bail out Greece, Portugal and Ireland, will now be superseded by the ESM, which will have a lending capacity of €500bn.

The ruling sparked a rally in the value of the euro, which soared to a four-month high against the dollar. The cost to the Spanish and Italian governments of borrowing over ten years fell.

German foreign minister Guido Westerwelle hailed the ruling as "a smart decision in the pro-European spirit of our constitution".

He added: "The first light at the end of the tunnel is visible. We must not relent in our decisiveness to overcome the debt crisis with budgetary discipline, orientation toward growth and European solidarity."

A London-based currency trader told The Times the result was “the best we could hope for”, adding: “This is very positive for risk and very positive for the euro.”

Jennifer McKeown, an economist at Capital Economics, was cautious, however. She told Citywire: “This would be enough to meet Spain and Italy’s joint financing needs from now until roughly the middle of 2014, significantly reducing the risk of an imminent default and eurozone exit.

“But there are at least three reasons not to sound the all-clear. For a start, this assumes that no more money is spent on other eurozone countries. Second, help for Italy and Spain could still take a long time to materialise. Third, and perhaps most importantly, bond purchases of any size can address only one of the symptoms of the eurozone crisis and not the cause.”

The Daily Telegraph’s Bruno Waterfield also sees trouble ahead. He believes the €190bn cap imposed on Germany’s contribution to the ESM could yet be a “major political obstacle”. He explains: “In the last two years of euro crisis, there has been only one certainty that the bill for propping up the euro always gets bigger.

“In fact the current size of the ESM - €500bn - now seems almost quaintly, naively tiny as the EU contemplates direct bank bailouts in Spain and bond purchases to shore up Italy, the eurozone's third largest economy.

“An increase in firepower will now become a major political event in Germany.”

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