12 Sep 2012

German court approves eurozone bailout fund

Germany’s leading court rejects calls to block the establishment of a permanent fund to support indebted countries.

Germany's leading court will make a decision today that could lead to renewed turmoil in the eurozone (Getty)

The court was asked to rule on whether the permanent 500bn euro bailout fund proposed by eurozone politicians, and backed by Chancellor Angela Merkel, was legal under Germany’s constitution.

Had it ruled against the European stability mechanism (ESM), to which Germany is expected to contribute 27 per cent of the funding, there were fears the debt crisis in the eurozone could be prolonged.

Because of the amount of money it has committed, Germany has a veto over the fund’s operation, and today’s court judgment clears the way for its ratification by the German president.

The ESM is due to replace the temporary European financial stability facility, which has been used to bail out Portugal, Ireland and Greece.

Euro at stake

With Greece and Spain in trouble and needing financial backing from other eurozone countries, the future of the single currency is at stake.

Wednesday also sees elections in Holland which could see the euro-sceptic Labour party come to power, although the Liberals have a narrow lead in the opinion polls.

EU finance ministers meet on Friday to discuss the German court’s decision and the European Central Bank’s (ECB) new bond-buying programme, which is designed to lower heavily indebted countries’ borrowing costs.


They will also consider Spain’s predicament. Madrid has requested support for its banks, but has not yet asked for help to prop up its entire economy.

In recent weeks, the most important development in the eurozone is the announcement by ECB President Mario Draghi that the central bank will buy governments’ debts as long as they stick to strict conditions.

No action has yet been taken, but Spanish and Italian borrowing costs have already fallen.

Make no mistake, the flurry of acronyms unleashed by European Central Bank President Mario Draghi today is a backdoor bailout of Spain. Read Economics Editor Faisal Islam's blog.