On Wednesday, Europe breathed a massive sigh of relief: Germany is not going to stop the efforts to save the euro.
The Federal Constitutional Court's green light for the European Stability Mechanism (ESM), the permanent euro bailout fund, has been welcomed across the continent. European leaders spoke of a "good day for Europe." European Parliament President Martin Schulz remarked with satisfaction that the ruling will help to stop speculation against countries in crisis on the financial markets.
Those markets reacted with relief to the ruling. Share prices and the value of the euro rose, while yields on Spanish and Italian bonds fell. The euro zone will now be "more stable, less risky," said David Thebault, a trader at the Paris-based financial services company Global Equities, in remarks to Reuters.
From the perspective of European leaders, the ruling from the Karlsruhe-based court was the second piece of good news in a week. Last Thursday, Mario Draghi, president of the European Central Bank, announced that the ECB would make unlimited purchases of sovereign bonds of crisis-hit countries on the secondary market to reduce yields. Now, the ESM adds another powerful weapon to the arsenal. The fund can make loans of up to €500 billion ($645 billion) to euro-zone states in crisis.
Taken together, both instruments form the new backbone for the monetary union. They are expected to usher in a long period of calm in the euro crisis. They make betting on a national default or exit from the euro zone suddenly less attractive.
Euro Group President Jean-Claude Juncker assumes that the rescue fund can enter into force at the next meeting of the Euro Group on Oct. 8. The Federal Constitutional Court's requirements are minor and will not require the ESM treaty to be tediously renegotiated. The justices' central demand, namely that the upper limit for Germany's liability can only be raised with the consent of the German parliament, is already contained in the treaty.
Do Double Standards Apply?
Around Europe, the special treatment for the German parliament, the Bundestag, has raised a few eyebrows nevertheless. It reinforces the impression that double standards apply in Europe. While other parliaments have to simply accept decisions made in Brussels, the Bundestag gets the right to have the last word. But politicians in Brussels have learned to accept special treatment for Germany, especially given the fact that neither the Federal Constitutional Court nor the Bundestag has ever overturned an important decision.
Now that the uncertainty about the court decision is behind them, European leaders can return to their agenda. In addition to fighting the crisis in Greece and Spain, the establishment of a banking union has the highest priority.
- Greece : At a meeting of euro-zone finance ministers in the Cypriot capital Nicosia on Friday, the Greek government is expected to explain its latest austerity measures. The meeting will be followed in October by the next report from the troika, comprised of representatives of the ECB, the European Commission and the International Monetary Fund (IMF). It is already considered certain that the Greek government has failed to achieve the predefined reform targets. Still, it is expected that the report will be formulated in such a diplomatic way that it will enable bailout money to continue to flow into the country, because none of the decision-makers has an interest in cutting off money for Greece.
- Spain : In Nicosia, the euro finance ministers will also discuss the situation in Spain. They have already agreed as a precaution to make up to €100 billion available to the country to prevent its ailing banking system from collapsing. The actual financing needs of Spanish banks is currently being reviewed. The Spanish government is also considering applying for a "precautionary" credit line with the ESM. This would enable the ECB to purchase unlimited amounts of Spanish bonds under its planned bond-buying program. But it remains unclear what conditions the country would have to fulfil for that program to start. Even though Draghi spoke of strict rules last week, Spanish Prime Minister Mariano Rajoy has rejected specific policy conditions on his country's budget in exchange for the ECB buying Spanish bonds.
- Banking union: Around the same time as the ESM ruling on Wednesday, the European Commission also presented a draft of the law for the new European banking authority. According to the draft, the ECB would already begin supervision of banks in the euro zone starting in January 2013. At the same time, banks are also supposed to be able to apply for direct aid from the ESM. But Germany and a number of non euro-zone EU member states believe the timeframe is too short. The German government wants to delay direct bank aid for as long as possible and is insisting that an "effective" banking regulator must first be established before euro-zone banks can be given access to the ESM. Meanwhile, Great Britain wants guarantees that the ECB will not create rules for banks outside the 17-country euro zone. There are also fundamental objections to the new powers that would be bestowed on the ECB under the plan. Critics, like Germany's opposition center-left Social Democratic Party, argue that an institution that lends money to banks can't at the same time be its supervisor.
Proponents of a common deposit insurance system argue that it is the only way to make any banking union truly crisis-proof. In Germany, however, lobbyists representing the Sparkassen savings banks as well as credit unions are mounting opposition to a Europe-wide deposit insurance scheme. They don't want to give up their national systems. At the moment, there is no possible compromise in sight.