“This is a good day for Germany, this is a good day for Europe,” said Chancellor Angela Merkel in a speech to parliament after the keenly anticipated ruling.
In a landmark ruling watched around the world, the Constitutional Court overturned a raft of legal challenges aimed at preventing President Joachim Gauck from signing two crucial crisis-fighting tools into law.
Delivering a momentous decision with far-reaching implications for the euro’s future, the eight scarlet-robed judges said Gauck could finally sign the European Stability Mechanism (ESM) and fiscal pact.
“The Second Senate of the Federal Constitutional Court has rejected the injunctions with the stipulation that a ratification of the ESM Treaty is only admissible if (certain conditions) can be guaranteed under international law,” Chief Justice Andreas Voßkuhle said.
“Our examination has shown that the laws with a high probability do not infringe upon the German constitution. That is why we have rejected the injunction,” he added.
The ruling came on a day of risks for the euro, which has enjoyed calmer times in recent weeks, as an anti-austerity party is seen likely to score big gains in Dutch elections and EU leaders unveiled plans for the first step towards a eurozone banking union.
It will come as an enormous relief to Chancellor Angela Merkel and her fellow European leaders as a rejection of the ESM would have triggered a fresh bout of chaos on financial markets and thrown the eurozone into a new political crisis.
The constitutional court specified that any financial burden for Germany arising from the ESM be strictly limited to its share of the fund’s capital or €190 billion ($244 billion).
If the burden were to increase beyond that amount, then it could only be done with the express approval of the German parliament, and both the upper and lower houses must be kept fully informed, the court said.
The professional secrecy to which the fund’s employees were bound “must not stand in conflict with the Bundestag and Bundesrat being comprehensively briefed,” the statement said, referring to the lower and upper chambers.
The court also ruled that Germany must ensure a de-facto opt-out clause, if it felt its interests were not being considered.
“The Federal Republic of Germany must make it clear that it does not want to be bound to the ESM Treaty as a whole if any reservations it might have should prove ineffectual,” Voßkuhle said.
The €500-billion ESM was set to replace the temporary European Financial Stability Facility (EFSF) and should have been in place by July 1.
But it needed Germany’s share of the rescue money to function and had thus been held up pending the court ruling.
It is designed to come to the aid of debt-stricken countries such as Spain and Italy.
Technically, the court ruling was solely on whether to grant applications for temporary injunctions by eurosceptic politicians and groupings and delay ratification of both the ESM and the fiscal pact.
It will decide only at a later date whether the two are compatible with the German constitution, and that ruling could take several months yet.
Nevertheless, the court did provide some strong guidance as what that final ruling might look like.
The plaintiffs included the Left party, an initiative called More Democracy including 37,000 citizens and an outspoken critic from the Bavarian sister party of Merkel’s conservatives, Peter Gauweiler.
They had argued that the ESM and the fiscal pact were incompatible with Germany’s Basic Law because they irreversibly delegate national sovereignty to the European level and interfere with parliament’s right to draw up budgets.
Moreover, this was all being decided without the necessary democratic backing, they complain.
But the court said such arguments were “unfounded”. There was no such democratic deficit and the stability-orientated framework of currency union remained intact, it argued.
And “the possibility of setting up a permanent stability mechanism does not lead to a loss of national budgetary autonomy because the Bundestag has not yet transferred budgetary competence to organs of the EU or its institutions,” it argued.