German court holds euro zone fate in its hands

Mon Sep 3, 2012 7:45am EDT
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By Stephen Brown

BERLIN (Reuters) - Germany's Constitutional Court holds the fate of the euro in its hands when it rules next week on whether a crucial euro zone financial rescue fund can go ahead.

A negative ruling, considered improbable by legal experts, would cast the 17-nation European single currency area into turmoil, spurring panic on bond markets by raising doubt over any more rescues of debt-laden southern states.

But if, as expected, the court gives a green light on September 12 to the euro zone's permanent bailout mechanism and a pact on stricter budget discipline, it may add conditions that constrain Berlin's power to pursue further European integration.

The court based in Karlsruhe in western Germany, one of the country's most trusted institutions, is unlikely to let Chancellor Angela Merkel completely off the hook.

Few experts expect the eight red-robed judges to reject the European Stability Mechanism (ESM)and fiscal pact outright, not least because of the devastating impact on financial markets.

"If they were to surprise us by striking down Germany's participation, I would think it'd be an utter bloodbath in markets," UniCredit global chief economist Erik Nielsen said.

But the sages may well demand more parliamentary consultation before Germany agrees to any further European integration, or signal that the process has gone as far as can be permitted without rewriting Germany's Basic Law.

"I don't think the court will block the ESM or the fiscal pact, so European integration of the euro will not come to an end on September 12," said Franz Mayer, a professor of European Union and constitutional law at Germany's Bielefeld University.   Continued...