Karlsruhe (MNI) – Germany’s Constitutional Court Wednesday allowed
Berlin’s ratification of the European Stability Mechanism, but it said
the German government must make clear that its liability under the ESM
treaty is strictly limited.

The eight-member panel of judges in Karlsruhe also backed the EU
fiscal compact, which significantly tightens collective enforcement of
EU budget rules by requiring that they be enshrined in national
statutes.

The court found that both signature European treaties were broadly
in line with Germany’s Constitution, but it warned the ESM treaty did
not clearly limit Germany’s liability to the E190 billion that the
government has signed up for.

Opponents of the ESM treaty argued Germany could be forced to pay
more than its agreed liability to the ESM if, for example, other
countries reneged on their payments. The court agreed in part, but said
it sufficed for Germany to make this limit clear rather than scuppering
the entire treaty.

The court said there could be no automatic increase in Germany’s
liability, that any further bailout funds would have to be approved by
Germany’s lower house of parliament, the Bundestag, and that the
government should include a “reservation” declaration to that effect in
its ratification of the treaty.

Today’s ruling should clear the way for German President Joachim
Gauck to sign the laws ratifiying the ESM and fiscal compact treaties
once such a declaration has been attached. Gauck has been waiting for
the court’s ruling ever since the Bundestag approved the two treaties in
late June.

The German government “must ensure that it is only bound by the
treaty in its entirety if no payment obligations that go beyond the
liability ceiling can be established for it without the consent of the
Bundestag,” the court said.

The government should “express that it does not wish to be bound by
the ESM Treaty in its entirety if the reservations made by it should
prove to be ineffective,” the judges added.

Technically, Wednesday’s ruling was not on the ESM and fiscal
compact per se, but on whether to grant temporary injunctions against
their ratification until the court has completed a full review of the
lawsuits brought against them by Germans who fear that their country is
over-extending itself on behalf of its poorer European partners.

The court also rejected a temporary injunction sought against the
European Central Bank’s new OMT bond buying program, saying this was
among the decisions that would fall into the remit of the full review.

The full review is not expected to be completed until sometime in
2013, however the comprehensiveness of the “summary review” issued today
makes it unlikely that much will change in the final decision.

The court said the fiscal compact did not amount to an infringement
on the Bundestag’s control over fiscal policy. It did note, however,
that Germany has the right to leave the treaty under international law.

This includes a “unilateral resignation (which) is at any rate
possible in the event of a fundamental change in the circumstances which
were relevant upon the conclusion of the treaty,” the court said.

The court also generally reaffirmed the Bundestag’s primacy over
budgetary policy, something which in the past has led it to suggest that
room for more European integration in Germany’s constitution is limited.
Court President Andreas Vosskuhle, in his summary of the decision
Wednesday, would only say that the amount of room for further
integration “remains to be seen.”

The court’s ruling, particularly on the ESM, is a crucial hurdle
for European leaders in their three-year struggle to confront the debt
crisis. The new bailout fund, intended to replace the temporary European
Financial Stability Facility (EFSF), adds E500 billion to
crisis-fighting efforts and is the heart of the so-called “firewall”
erected by Eurozone governments to protect countries like Spain and
Italy from the ever-looming threats of unsettled financial markets.

The ESM is also key for the new bond buying program announced last
Thursday by the ECB. That’s because the ECB insists that before it will
buy any sovereign debt in the secondary market, the beneficiary country
must first sign up for an aid deal with the bailout fund, and the fund
itself must be prepared to buy bonds at auction. Germany is the biggest
financial contributor to the ESM. The EFSF alone, which already has
significant outstanding commitments, would have a more limited capacity
to participate in the ECB plan.

— Frankfurt bureau: +49 69 720 142; email: ccermak@mni-news.com

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