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German court says euro zone's crisis fund is legal

The highest court in German upheld a 2012 ruling on Tuesday, confirming the legality of the euro zone's new, permanent crisis defense mechanism.

The 700 billion euro ($974 billion) European Stability Mechanism (ESM) is a crisis fund which replaced the temporary European Financial Stability Facility (EFSF). The fund issued bonds at the height of the euro zone sovereign debt crisis in 2012. The proceeds were lent to troubled countries under a bailout program.

The ruling - which was widely anticipated by market watchers - means that German taxpayers' ESM liability must be limited to 190 million euros.

(Read more: Germany willsend bond-buying program to European court)

The Judges of Germany's Constitutional Court
Matthias Hangst | Getty Images | Getty Images News
The Judges of Germany's Constitutional Court

Making loans to struggling euro zone nations or buying up bonds in debt markets, this euro zone fund was initially given a fast-track ruling by the court back in 2012 after eurosceptics questioned whether it conformed to German law. Two caveats placed on the fund were that the Bundestag lower house had the powers to veto it and that it could ensure limited liability for German taxpayers. Both rulings were confirmed by the constitutional court on Tuesday.

Christian Schulz, a senior economist at Berenberg Bank told CNBC that the news was positive as there was no "additional trouble" from Karlsruhe court. "It is still an important, positive ruling because the ESM is central to the euro zone's financial stability architecture," he said.

However, although it is widely expected to be considered as legal by the constitutional court, investors were keeping a keen eye on the decision for any signs on future issues surrounding some of the ECB's crisis-fighting policy tools. In September 2012, ECB chief Mario Draghi announced the Outright Monetary Transactions (OMT) program which sought to buy the sovereign bonds of stricken euro zone members if they applied for aid.

(Read more: 'Battle lines drawn' in German court over ECB bond buying)

Draghi hasn't so far had to use the program but it has spread calm across European markets with sovereign debt yields for struggling nations receding from their peaks during the crisis. Like the ESM, the OMT had to be ratified by the court, with the German taxpayer essentially being asked to backstop other euro nations.

In early February, the German judges decided to pass the OMT case on to the Court of Justice of the European Union to take into account the views of Luxembourg. It is expected to make its own ruling in the future but no further comments were made on the likely outcome of this ruling on Tuesday. Schulz said that this would be a more important decision because the OMT has had such a major impact on markets compared to the ESM. The decision by the court to send the ruling over to Luxembourg also highlights the uncertainty regarding the OMT, he said, with the German judges taking a more negative approach than they did with the ESM program.

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