Roundup: German court decision boosts markets
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E-mail Xinhua, September 12, 2012
By Josephine McKenna
ROME, Sept. 12 (Xinhua) -- Germany's Constitutional Court on Wednesday cleared the way for the creation of a 500-billion euro (643 billion U.S. dollars) emergency fund in a decision that immediately lifted financial markets and gave Chancellor Angela Merkel a much-needed political boost.
"The news of the verdict was a very good piece of news, because it removes the last hurdle for the implementing of the European Stability Mechanism (ESM) and fiscal compact," Italian Prime Miniter Mario Monti said.
"The verdict of the court talks about the overall commitment that Germany can take and says that this has to be discussed by the parliament," he added.
"This is a good day for Germany and it is a good day for Europe," Merkel told the German parliament in Berlin immediately after the decision.
"Today, Germany once again sends a strong signal to Europe and beyond: Germany is resolutely fulfilling its responsibilities as the biggest economy and trusted partner in Europe," she said.
The euro rose to 1.2902 U.S. dollars, its highest level against the dollar in four months, and financial markets rallied after the court's eight judges in Karslruhe ruled that Germany could contribute to the new ESM.
The court rejected a claim from former German Justice Minister Herta Daubler-Gmelin from the opposition Social Democratic Party who filed a constitutional complaint against the euro rescue fund while 37,000 people also signed a petition asking the court to block it.
"Our examination has shown that the laws with a high probability do not infringe upon the German Constitution," said Chief Justice Andreas Vosskuhle.
"That is why we have rejected the injunction," he said.
The court's decision means the German President Joachim Gauck can now endorse the fund which is expected to be established in October with Germany contributing 27 percent of the total kitty.
But the court also imposed strict conditions including a requirement for parliamentary approval for funding beyond the agreed German contribution of 190 billion euros to the new fund.
It is a significant victory for Merkel as she seeks a common strategy to battle the European debt crisis amid growing antagonism from her political opponents who fear Germany is assuming too much responsibility for the financial dilemmas of its neighbors.
With the ruling, the 17 countries of the eurozone can proceed with the establishment of the European Stability Mechanism which will work with the European Central Bank to buy the bonds of countries such as Italy and Spain and prevent their default.
Monti said it "removes the last hurdle" for the ESM activation and will not "impede market stability."
EU Commission President Jose Manuel Barroso seized the opportunity to argue for the European Union to evolve into a tighter "federation of nation-states." Addressing the EU parliament in Strasbourg, Barroso said that step was necessary to help fight the continent's economic crisis.
But economists cautiously welcomed the German court decision saying the new fund would create greater flexibility for saving the euro while changing the nature of the eurozone.
Giuseppe Di Taranto, an economics professor from Luiss University in Rome, told Xinhua: "The decision is important for Europe because it allows the ECB to acquire debt in the secondary market and that will help to lower the spread and prevent a default in Spain or Italy."
In Florence, Professor Elena Carletti from the European University Institute said Italy would be under pressure to continue its economic reform.
"It takes away the uncertainty for a while," Carletti told Xinhua, adding. "I think Italy is more protected than before since there is a chance to ask for help. The risk is that the southern countries will go back on the reform process so it is a delicate time for Italy."
But Dr Joerg Kraemer, chief economist at Germany's Commerzbank, went further warning the decision paved the way for the mutualization of debt and that the eurozone would become an 'Italian Monetary Union.'
"The emerging debt mutualization will change the character of the monetary union," he said in a statement.
"It will gradually become what we call an 'Italian Monetary Union", with parallels to Italy in the 1970s and 1980s. A loose ECB monetary policy, a soft euro and higher inflation should take competitive pressure off the peripherals (countries) and stabilizse the monetary union for several years."
The ESM is designed to back up the current 440 billion euros held in the temporary European Financial Stability Facility and the first meeting to formally establish the new fund is expected to be in Luxembourg on October 8.
The new fund will have the power to lend money to eurozone countries with soaring borrowing costs and also to buy their bonds in the primary market.
Last week's European Central Bank's decision enables the central bank to back up the ESM by buying shorter-term bonds in the secondary market to help reduce borrowing costs.
Today, the reaction from the markets was positive but there is still a long way to go before the fund can guarantee some kind of stability.
Milan shares were up 1.05 percent in early trading while the spread between Italian 10-year bonds and the German benchmark was up slightly to 343 points in the early afternoon.
The yield, an important indication of investor confidence, was 5.04 percent, up from 4.9 percent while Spain's equivalent spread was stable at 397 points, and its yield had dropped to 5.61 percent. Enditem
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