German Constitutional Court judges arrive to read the verdict

The German court has ruled that the European bailout fund is legal.

Germany and Europe can both breathe a sigh of relief : The Federal Constitutional Court has rejected a petition to stop the ratification of the permanent euro rescue fund, the European Stability Mechanism. The decision clears the way for the ESM to go into effect.

The court ruled there are no grounds to stop the country from ratifying the European Stability Mechanism.

The court ordered that ratification can only be completed if there are constitutional assurances that Germany’s current maximum liability of €190 billion ($245 billion) can only be increased with the approval of the German representative on the ESM board, Spiegel reported.

In addition, Germany must ensure that the treaty is implemented in a way that ensures that representatives of the German parliament, the Bundestag, and the Bundesrat, the legislative chamber that represents the federal states, are comprehensively informed of the bailout fund’s activities despite the professional secrecy that ESM employees are required to adhere to.

Germany is the only euro-zone member state that has not yet ratified the treaty establishing the ESM. Without the participation of the EU’s largest member state, the bailout fund has not been able to begin its work yet.

Following Wednesday’s ruling, German President Joachim Gauck is now free to sign the ESM treaty, which was already approved by Germany’s parliament, the Bundestag, in June. The ESM can only go into effect with his signature.

The permanent euro bailout fund will operate in parallel with its predecessor, the European Financial Stability Facility (EFSF), for a period, completely replacing it by mid-2013. The ESM will be equipped with €700 billion in capital but will only be able to lend a maximum of €500 billion.

The group Mehr Demokratie (More Democracy), together with 37,000 German citizens, had sued at the country’s highest court to halt the ESM’s ratification. The group alleged that Germany was entering into «unlimited and irreversible liability risks.» Peter Gauweiler, a politician with the conservative Christian Social Union who is a prominent critic of the German government’s euro rescue policies, and the Left Party had claimed that accepting the new liabilities would be irresponsible.

In accordance with its share capital in the European Central Bank (ECB), Germany is providing guarantees for 27 percent of the ESM’s funds. Germany is required to provide €22 billion in cash to the fund as well as guarantees totalling close to €170 billion. But critics fear that Germany will have to provide far more cash and guarantees in the end.

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