Germany’s Constitutional court upholds participation in EU bailouts

Germany was not acting unconstitutionally in sanctioning a Greek bailout, the court says – though future bailouts need greater approval.

Updated, 11.07

GERMANY’S CONSTITUTIONAL COURT has this morning rejected a lawsuit which claimed Germany’s participation in EU bailouts was in breach of national and European law – upholding the country’s participation in the bailout of Greece.

In a landmark ruling, the court in Karlsruhe threw out a case taken by a politician and academics, who had claimed claiming that Germany’s participation in the first European bailout – that of Greece – was illegal.

In a press release, the court said the act which allowed Germany’s participation in the Greek bailout did “not violate the right to elect the Bundestag under Article 38.1 of the Grundgesetz”, Germany’s constitution.

“By adopting these Acts, the German Bundestag did not impair in a constitutionally impermissible manner its right to adopt the budget and control its implementation by the government or the budget autonomy of future Parliaments.”

That case, if it had been upheld, could also have threatened the viability of bailouts to Ireland and Portugal – which were approved by Germany through the same means as the Greek one, although the exact nature of the bailout vehicle was different in those cases.

The court did note, though, that the German federal parliament must have a greater say in any arrangements that lead to future European bailouts – with the Bundesrat’s finance committee required to give its assent for any future bailout operations.

It added that its ruling should not be considered tantamount to a “blank cheque” for further German aid to weaker countries.

Speaking to the Bundesrat this morning, Chancellor Angela Merkel welcomed the court’s ruling, saying that while future bailouts would now be “more complicated” and take longer to approve, Germany could still lead the efforts to resolve the European debt crisis.

The ruling will be met with relief by struggling European countries, but comes at a cost, with the German parliament now being given an unquestionable right to veto the country’s participation in future bailouts.

While previous bailouts are safe, the potential bailouts of larger countries like Italy and Spain – both of whom are now reliant on ECB purchases of second-hand bonds in order to keep their borrowing costs down – could now be scuppered by Germany’s domestic politics.

The cost of borrowing for those two governments has fallen this morning, as investors welcome the court’s ruling.