France, Italy welcome key German court decision on European bailout fund

In a landmark ruling, the Constitutional Court in Karlsruhe, Germany dismissed legal challenges aimed at preventing Germany ratifying the European Stability Mechanism (ESM).

The 500 billion euro ESM was designed to replace the EU’s current temporary bailout funds for stricken eurozone members, and was supposed to be in place by July 1st.

Dossier: Eurozone in crisis

Since Germany is due to contribute 27 percent of the fund, it could not proceed without German ratification, and the mechanism had been on ice until the court handed down its decision.

European lawmakers, economists and investors around the world had been waiting anxiously for the court's verdict.

The German Chancellor, Angela Merkel, hailed the ruling as a “good day for Europe”.

“Germany is decisively living up to its responsibilities as Europe’s biggest economy and a reliable partner,” she told the German Parliament.

“This decision allows for the stabilisation of the Eurozone through the possibility for the ESM to intervene, and it is very good news for us,” the French minister for European Affairs, Bernard Cazeneuve, said.

The decision was also welcomed by the Italian Prime Minister, Mario Monti, whose country has been under increasing pressure to service its public debt.

However, the court decision strictly limited Germany’s contribution to 190 billion euros, and any increase would need to be passed by the expressed agreement of the German parliament.

The judges also ruled that Germany must ensure a de-facto opt-out clause if it felt its interests were not being considered.

European markets were up after the decision, the euro strengthened and Spanish and Italian borrowing costs dropped.

Holger Schmieding, an analyst at the Hamburg-based Berenberg Bank, told news agency AFP it was “another big step towards defusing the euro crisis,” but warned against over-excitement.

The European Commission President, Jose Manuel Barroso, also welcomed the decision.

As the ruling was being handed down, Barroso called for a full EU banking and budget union, and told the European Parliament that setting up a single bank sector regulator in the shape of the European Central Bank is an essential response.

Under the plan, the ECB will assume “strong powers…for the supervision of all banks in the euro area, with a mechanism for non-euro countries to join on a voluntary basis,” according to an accompanying statement.

Other provisions cover relations with the current London-based European Banking Authority, establishing a single rulebook, a single supervisory mechanism, and steps towards a single system for winding up failed banks.