German court backs permanent rescue fund with liability cap

Federal Court of Justice of Germany in Karlsruhe Federal Court of Justice of Germany in Karlsruhe

Germany’s top constitutional court rejected bids to block ratification of a permanent euro-area rescue fund, while ruling the country’s 190 billion-euro ($245 billion) contribution can’t be increased without legislative approval.

The Federal Constitutional Court in Karlsruhe dismissed motions that sought to block the 500 billion-euro European Stability Mechanism and a deficit-control treaty championed by Chancellor Angela Merkel. The court said a cap of about should be set on potential German liabilities, unless parliament backs the allocation of extra funds.

“We are an important step closer to our goal of stabilizing the euro,” German Economy Minister and Vice Chancellor Philipp Roesler told reporters in Berlin after the ruling today. “It has always been the goal of this government” to establish a “clear limit and to include parliament in all important decisions.”

The legal challenge delayed efforts by Merkel and other euro-area policy makers to stem the region’s debt crisis. In the neighboring Netherlands, Prime Minister Mark Rutte, a Merkel ally, is seeking re-election today.

Stocks and the euro rose after the ruling. The single currency gained 0.3 percent to $1.2889 at 11:42 a.m. in Berlin, while the Stoxx Europe 600 Index rose 0.8 percent.

Bond Buying

Much in the crisis hinges on the permanent ESM, which is designed to go into operation as the temporary European Financial Stability Facility is phased out through next year. The bailout fund would work in tandem with the European Central Bank in buying bonds to lower yields for states such as Spain and Italy.

Last week, ECB President Mario Draghi said the ECB was ready to buy unlimited quantities of short-dated government bonds of nations signed up to rescues from the ESM or EFSF. While rejecting a last-minute request for an emergency injunction over the Draghi announcement, the court said it would review a challenge to the ECB bond-buying programs during additional proceedings in the case.

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