- Associated Press - Wednesday, September 12, 2012

KARLSRUHE, Germany (AP) — Germany’s highest court paved the way on Wednesday for the creation of Europe’s 500-billion-euro ($640 billion) rescue fund, after it rejected calls to block it.

The Federal Constitutional Court’s decision clears the way for German President Joachim Gauck to ratify the fund, the European Stability Mechanism. Jean-Claude Juncker, who chairs meetings of the 17-nation euro area’s finance ministers, said he planned to convene the first meeting of the fund’s board of governors on Oct. 8.

“Today, Germany is once again sending a strong signal to Europe and beyond: Germany is assuming with determination its responsibility as the biggest economy and as a reliable partner in Europe,” Chancellor Angela Merkel told parliament in Berlin hours after the ruling.

“This is a good day for Germany, and it is a good day for Europe,” she said.

The ESM wouldn’t have been able to start work without Germany, its No. 1 contributor. Stocks across Europe rallied strongly on the ruling, the euro spiked to a four-month high of $1.2906, and the borrowing rates of troubled economies, such as Spain and Italy, eased further.

The court did, however, insist that Germany has to secure legal guarantees that parliament must vote on any further increases in its contributions to the ESM. These guarantees must be secured before Mr. Gauck signs the fund into law — though that did not appear likely to be a major issue.

Opponents had challenged Germany’s ratification of the ESM, arguing it violated the country’s constitution. They sought an injunction preventing Mr. Gauck from signing the legislation — and also sought unsuccessfully to block the so-called fiscal compact, the budget-discipline pact pushed by Mrs. Merkel and signed by most European Union countries.

Mr. Gauck’s office said in a statement that he plans to make a decision on signing the legislation into law “as soon as possible,” but it isn’t yet possible to specify a date.

The court’s decision came just days after the European Central Bank announced a plan to buy government bonds of struggling countries if they apply to the eurozone’s bailout funds.

“Within less than a week, the eurozone has finally received its long sought-after impressive bazooka,” said Carsten Brzeski, an economist with ING in Brussels.

“As a result, Eurozone governments have now received more time to do their homework, implement reforms and austerity measures,” he added.

Germany is liable for about 27 percent — about 190 billion euros ($245.03 billion) — to the overall European bailout program totaling 700 billion euros ($902.89 billion), which includes the ESM and remaining money from the current temporary fund, the European Financial Stability Facility.

The taxpayer-backed fund is crucial to the eurozone’s debt crisis resolution efforts because it can lend money to governments that can’t borrow otherwise, and markets were nervously awaiting the ruling. The ESM originally was slated to start work on July 1.

The supreme court’s chief justice, Andreas Vosskuhle, said the case posed “special challenges” — not least because the financial and political consequences of a possible delay were “almost impossible to estimate reliably.”

The court still has to deliver a full ruling on the substance of the plaintiffs’ complaints. But Justice Vosskuhle made clear that his court’s ruling on the calls for a temporary injunction — delivered after two months of deliberations — reflected the likely outcome of the case.

“The examination showed that the laws that have been challenged with high probability do not violate the constitution,” he said.

Still, he said, Germany must get legal guarantees before ratification that the provisions of the ESM can’t be interpreted in such a way that Germany’s financial liability could be increased without the approval of Berlin.

Germany also must ensure that provisions in the ESM treaty demanding “professional secrecy” from fund employees don’t stand in the way of the German parliament’s being informed in full about fund decisions.

Wednesday’s ruling was in line with previous rulings in which the Federal Constitutional Court approved European political and financial integration, and eurozone rescue measures, while insisting that the German parliament’s right to have an early and thorough say on them be safeguarded.

Justice Vosskuhle said it wasn’t his court’s job to decide on the “usefulness and sense” of measures approved by a large majority of German lawmakers.

“No one can say for sure what measures are actually the best for Germany and the future of our united Europe in the current crisis,” he said. He insisted, however, that “only as a democratically legitimized community governed by the rule of law does Europe have a future.”

In attaching strings to Germany’s ratification, the court gave some satisfaction to the plaintiffs. Herta Daeumler-Gmelin, a former justice minister who represented some of them in court, said it was important that the court clearly set limits on German liability and reaffirm parliament’s right to have a say.

“I am not unhappy with this decision,” she said.

David Rising and Geir Moulson contributed from Berlin.