September 12, 2012 may become a day as entrenched in the EU’s collective consciousness. On Wednesday, Germany's Constitutional Court ruled that the country could legally participate in the European Stability Mechanism -- the proposed organization designed to provide aid to Euro zone countries with financial troubles -- by rejecting requests for an injunction.
Few legal scholars, investment analysts or global political consultants anticipated the court would strike down Germany’s ability to participate in the EU bailout. "If they were to surprise us by striking down Germany's participation, I would think it'd be an utter bloodbath in the markets," UniCredit global chief economist Erik Nielsen said on CNBC. An unfavorable ruling would place the 17-nation European single currency area into turmoil, spurring panic in bond markets by raising doubt over any more rescues of debt-laden southern states.
The court approve the ESM with the condition that Germany's contribution be capped at 190 billion Euros, or about $245 billion, with the German parliament able to approve additional funding as needed. Still, the implications of the ruling going forward are still not entirely clear.
"As in the past, it will be foggy, open to interpretation and all parties involved will say 'We won'," Franz Mayer, a professor of European Union and constitutional law at Germany's Bielefeld University told Reuters in an interview last week.
Yet Germany’s participation in the ESM is critical to prevent multiple struggling southern nations from becoming insolvent.
The court’s ruling on Wednesday is in response to an injunction from over 12,000 plaintiffs, including members of Chancellor Angela Merkel's own coalition, the hard-line Left Party, and conservative members of the academic community. They contend the EMS treaties undermine German lawmakers' constitutional right to decide on the budget and expose Germany to potentially unlimited financial liability.
"For Germans this is nothing new, every major decision on European integration is contested domestically so we are pretty much used to it and not overly worried," said economist Klaus Deutsch of Deutsche Bank.
Merkel considers approval of the EMS "of the utmost importance. The worst-case scenario for euro zone leaders would be Karlsruhe rejecting it, leaving them in the short term with only 150 billion euros left in the EFSF.”
The ruling could partially placate growing unrest among German taxpayers’ disproportional participation in the EMS, but the referendum debate will not go away. Opinion polls suggest seven out of 10 Germans would like to have a direct say in how much more sovereign power -- especially regarding how their taxes are spent -- should be surrendered to Brussels.
The German people have no love for Mario Draghi, the president of the European Central Bank, and his plans. Draghi's pledge of unlimited bond-buying aimed at lowering the long-term interest rates that Spain, Italy, and other distressed sovereign borrowers must pay, has found little support among the German people. This sentiment is echoed by Bundesbank President Jens Weidmann, who opposes an unorthodox bond-buying program on principle. Many contend attempting to garner Weidmann’s support was the reason Draghi stipulated that Thursday’s announced unlimited bond buying program would require sterilized activity.
Sterilized activity which would ensure ESM’s bond purchases didn’t increase the euro area’s money supply igniting inflationary pressures. The bond-buying plan that Draghi presented additionally included the condition that governments seeking ECB support have accepted fiscal reform agreements in place with the ESM.
While markets celebrated Draghi’s announcement on Thursday, analysts reviewing the details viewed it with limited enthusiasm. The ECB’s plan to backstop Spain, Italy and other troubled European nations’ bond sales does nothing to address the causes of a continent slipping ever closer into a double-dip recession.