The painful three-year wait may be closer for a solution to the eurozone’s debt problem after Germany’s Constitutional Court agreed to ratify Europe’s new bailout fund.
The ruling removes the final political internal blocks for Germany to support the European Central Bank plans to underwrite the debt of Eurozone countries by buying bonds.
The way is not completely clear – the court imposed conditions on the German government contribution to the €700 billion rescue fund, but they are less onerous than feared.
First, German liability is capped at €90 billion, the amount demanded by the current ESM treaty. Any increase will need approval by parliament.
Good day for Europe
Second, a clause in the ESM treaty which seeks to keep the workings of the fund confidential must not cut the German parliament out of the ‘need to know’ loop.
On the back of the ruling, the euro jumped up to a four-month high against the US dollar and global stocks rose to a five-month peak.
“This is a good day for Germany and a good day for Europe,” German Chancellor Angela Merkel said in a speech to parliament.
Germany had been the only country in the 17-state Eurozone not to ratify the European Stability Mechanism, part of the single currency ‘s toolkit to tackle the sovereign debt turmoil that has consumed Greece, Ireland and Portugal, and threatens Italy and Spain.
Positive reaction
European Central Bank (ECB) President Mario Draghi has already announced plans to buy “unlimited” amounts of government bonds issued by Spain and Italy to cut their borrowing costs. The ESM is part of the means for the ECB to finance the buy-out.
“The reaction in the financial markets has been positive with equities adding to their recent positive run, the euro testing 1.2900 against the US dollar and the 10-year cost of borrowing for Spain has dropped to a more palatable 5.62%,” said Chris Towner, a director at currency specialist HiFX.
“This is good news for the European Union and has certainly been reflected in the value of the Euro. Stability has returned thanks to the ECB and this gives a foundation for the EU leaders to start to put a proper framework in place for further integration. Saying that though, now that support is in place austerity is required and this may put a brake on further gains for the euro.”