The German Federal Constitutional Court and the European Stability Mechanism

By: Carsten Lexa

The German Federal Constitutional Court in Karlsruhe dismissed motions on Wednesday that sought to block the Euro Zone’s permanent bailout fund, the European Stability Mechanism, or ESM.

The ESM is designed to handle bailouts and work in tandem with the European Central Bank to buy the bonds of countries, such as Italy and Spain, that are straining under high interest rates.

Nonetheless, the Court placed a €190 billion ($240 billion) cap on German liabilities, unless Parliament agrees to provide additional guarantees.

The court decision came against expectations that the Federal Constitutional Court would not allow a permanent bailout fund, because such a fund would help finance states, which is not acceptable under the European Treaty. However, the Federal Constitutional Court has a long history of not interfering with the political decisions regarding Europe, as long as these decisions are not completely “out of this world”, meaning as long as there is at least a minimum of sense behind the political decision.

The reactions on this court decision were mixed. Although the international markets were up because of the expectation of more liquidity that will be “pumped” into the markets and most of the politicians in Germany and other countries around the world showed strong signs of relief, a lot of economists are not satisfied with the ruling. The biggest fear is that of a “transfer union”, in which money is transferred from “strong” countries (strong in an economic sense) like Germany to “weak” countries like Greece or Spain. Such a transfer union will not eliminate the problems of the weaker countries, but might worsen the problems in countries that still have strong economies.

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