Legal Move Threatens EU Rescue Fund

Hopes of launching the euro zone’s permanent rescue fund in the first days of July suffered a blow on Thursday when one of Germany’s opposition parties said it would ask the country’s highest court to suspend ratification while deciding whether it complied with the constitution.

Reichstag Parliment building, Berlin, Germany
Maremagnum | Getty Images
Reichstag Parliment building, Berlin, Germany

The legal move overshadowed an agreement between Germany’s government and the opposition parties – other than the Left—clearing the way for parliamentary approval by the end of June of the 500 million euros ($628 million) European Stability Mechanismand the EU’s new fiscal compact in exchange for measures to boost economic growth and progress towards European financial transaction tax.

The court challenge by the radical Left party underlines the role of the Karlsruhe court in shaping Germany’s response to the euro zone crisis. It follows similar appeals in 2010 to block disbursement of emergency loans to Greece and the launch of the European Financial Stability Facility, the euro zone’s temporary bailout fund.

On those occasions, the court rejected applications for injunctions ruling that any delay would cause greater damage to Germany than a temporary constitutional infringement. It then took the court over a year to hear arguments and then ultimately ruled in favor of both bailout initiatives.

Similarly, the court is likely to reject an injunction to stop the launch of the ESM while it assesses its legality, but it could still take a few weeks even to reach that decision on the injunction.

The ESM is due to come into effect at the beginning of July and could have been immediately tapped to fund a bailout of Spain’s banks, although ratification may also be delayed by a week in Italy. The fiscal compact is meant to come into force on January 1.

Chancellor Angela Merkel thrashed out a deal with opposition leaders in three hours of talks in her office in Berlin. It will allow the Bundestag to vote on June 29 – although Joachim Gauck, German president, now will not sign the bills into law until the court decides on how to proceed.

In Berlin on Thursday, opposition leaders claimed a significant victory with the agreement over the ESM, forcing Ms Merkel to adopt a more proactive policy to boost economic growth and commit herself to fighting for a financial transaction tax even if it involves only nine members of the euro zone.

Wolfgang Schäuble, finance minister, has warned that opposition to the FTT from the UK, and euro zone members such as Ireland, Finland and the Netherlands, could scupper a deal. But Germany will now push for a tax to be agreed among the minimum legally possible – nine of the 17 euro zone members.

The compromise will force Ms Merkel to fly home from the European summit in Brussels on June 29 to attend a special late Friday afternoon session of the Bundestag, to report on her success in getting an active growth plan agreed, and wider agreement on the FTT.

She was forced to negotiate with the opposition because the fiscal compact is a treaty to change the German constitution and therefore requires a two-thirds majority in parliament.

Ms Merkel will also have to win the same majority in the Bundesrat from the 16 federal states and further talks will take place to win their backing on Sunday. They are concerned that the pact will restrict their budget powers.

Failure to reach agreement would have been a humiliation for the chancellor, who has insisted that her euro zone partners all adopt the fiscal compact—including a constitutional “debt brake” enforcing a balanced budget—in some cases against their better judgment. Ireland was constitutionally obliged to put the pact to a referendum.

Ms Merkel was determined to link the two treaties in a joint vote in the Bundestag, in order to persuade rebels on her own backbenches to back the ESM. By tying it to the fiscal pact, she is seeking to demonstrate that more German money will not be pledged in guarantees to euro zone partners without the strict budget discipline enshrined in the fiscal pact.