Germany Court Ruling Will Save the Euro Zone

The second senate of the Federal Constitutional Court of Germany announced today the verdict on the permanent European Stability Mechanism (ESM) and the European fiscal pact in Karlsruhe, Germany. The Court has ruled in favor of the German participation in the ESM and therefore made it possible for European recovery to commence.

Critics had argued that the ESM commits Germany to potentially unlimited funding of the debt made by other members of the euro zone. Around 37,000 people in Germany had signed a petition to the German Constitutional Court, asking it to block the treaty and call for a referendum. However, without the German support, as it is supposed to contribute with 27% of the initial fund, ESM could not be brought to life. The ruling of the court has significant implications for both Germany and Europe. Despite firm words of warning in the past, the court has never ruled against the ratification of a major EU treaty and most politicians in Berlin, including Chancellor Angela Merkel, expected that the constitutional guardian in Karlsruhe would give its blessing to the ESM.

After the ruling, German President Mr. Joachim Gauch will be legally able to sign laws concerning the ESM and the fiscal pact. By doing so, Germany will be the last member of the ESM family to ratify the treaty, even though it was leading the negotiation process. This particularly means a relief for the German Chancellor, as the constitutionality of her euro-saving politics has been confirmed. Moreover, her position in Germany itself is strengthened by the ruling and her international image is saved. However, one of the provisions of the ruling is that German government will have to adhere to ratification by Bundestag for any decision concerning ESM funds. This further means that Merkel’s life is going to become a little more difficult, as she will be required to make sure that she has the majority support in the Bundestag for any decision concerning the ESM and the euro-project.

Stock markets across Europe showed gains following the Karlsruhe ruling. Eurostoxx, an index of blue chip European companies, rose briefly by 1.2. 

Spain's leading index, Ibex, also rose for a time over 1%. 

Meanwhile, Italy's FSTE rose by more than 1 percent. This positive trend is grounded in the belief that stability of the investments in Europe now has better perspective. Furthermore, investors themselves are reinsured that their investment is secured by a support financial mechanism.Moreover, the positive trends on European stock market means that in the near future, it will become cheaper for EU countries to borrow money, as the interest rate for their loans will decrease.

And finally, the very important fact for the EU integration is that the ruling has reinstated budgetary sovereignty of Germany, by prescribing the necessity of voting on financial transactions towards the EU. This is an encouragement for the supporters of intergovernmentalist approach in the EU, since it brings power back from federal structures of the Union to the national ones.