The long awaited decision by the German Constitutional Court on the ESM didn’t deliver major surprises. The Court approved the ESM but capped Germany’s contribution to the fund to 190 Billion Euros, the share set out in the current ESM treaty. Any increase in the amount will require prior approval by the Bundestag, Germany’s lower house of parliament. Germany’s bailout exposure so far amounts to 110 Billion Euros. Merkel’s coalition had no problems passing earlier bailouts through parliament with the support of the opposition.
The other condition set out is that the the clause in the ESM treaty which seeks to keep decisions of the fund confidential “must not stand in the way of the comprehensive information of the Bundestag and of the Bundesrat” the court said. Germany may have to take some form of legislative action to include these conditions in the ESM treaty but this is not expected to take much time. Jean-Claude Juncker set a first meeting of the ESM’s board of governors for October 8.
The ruling is largely an expected outcome although according to J.P. Morgan economist Alex White the conditions as significantly less onerous than they might have been. The ruling did spark a small Euro rally, the EUR/USD gained over 50 pips in the initial reaction but closed the day only 34 pips higher from its pre-ESM ruling price. We’ll go over the different markets reaction to the ruling in more detail in the next article.
In her first reaction to the court ruling, Merkel said that “Germany is sending a strong signal to Europe” adding that the Court’s decision gives security to taxpayers and the German Parliament. According to Merkel, the first steps in boosting European competitiveness have been taken. She again rejected a joint debt liability for the Eurozone and insisted that the countries must begin by solving their own problems first. Merkel again expressed her support for the newest ECB bond buying plan, because of its “strong conditionality” adding that she sees the role of the ECB as supporting German policy.
Germany’s Finance Minister Schaeuble in comments made on German TV said that “No country in Europe can hope for the ECB to fire up the money printing press” adding that “Germany will make sure that it doesn’t happen”. He said that the ESM does not have a mandate to finance states and added that it can’t get a banking license.