German court checks Merkel's power in eurozone crisis

In a key ruling today, Germany's Federal Constitutional Court rejected legal challenges to the country's participation in bailouts for ailing eurozone countries.

But the judges also ruled that future moves by Germany to offer economic aid or create new fiscal instruments for the eurozone require parliamentary backing.

The decision is unlikely to limit the amount of cash economic powerhouse Germany adds to future eurozone aid packages, but it does amount to a significant check on the government's control in mitigating the eurozone crisis.

“Chancellor Merkel can no longer just travel to Paris, agree [to] some far-reaching deal on bailout terms with President Sarkozy, and then present the facts to the German people,” says Hans Hugo Klein, a former constitutional lawyer. “The days of self-glory are over.”

The complaints, brought by a conservative member of parliament and a group of five economists, argued that the creation of the bailout fund violates the German Constitution, which protects citizens’ right to own property and have democratic representation, as well as parliament’s right to control the budget.

The panel of eight judges rejected these claims in regard to current agreements like the European Financial Stabilization Facility (EFSF), which was installed in May 2010 as a reaction to the Greek sovereign debt crisis. But the judges stressed the need to follow democratic procedures in the ongoing reform of the rescue mechanism.

“As parliamentarians, we are satisfied with the verdict,” Wolfgang Bosbach, a conservative MP, told reporters. “The court has ordered the government to get approval from the parliamentary budget committee on all decisions affecting the budgetary sovereignty of the German people. It is not enough to just inform lawmakers.”

German guarantees for the European rescue fund are supposed to rise from 123 billion euros ($173 billion) to 211 billion euros ($296 billion), which amounts to roughly two-thirds of the country’s budget.

Mr. Bosbach is one of a dozen of MPs from Chancellor Angela Merkel’s own party who have announced they will reject the planned expansion of the EFSF in a vote later this month. Approval from all euro members is needed before the end of September to release more financial aid to Greece. But critics like Bosbach argue that the rescue fund is “a safety cushion for countries living beyond their means."

Many economists have praised today’s ruling. “This verdict makes the euro rescue operation easier rather than harder,” says Holger Schmieding, chief economist at Berenberg Bank.

Financial experts had expected the court to ask for the involvement of the whole parliament in future decisionmaking. The fact that the chancellor needs only the approval of the budget committee allows for the necessary speed and flexibility, says Mr. Schmieding.

Mrs. Merkel postponed a planned speech on the budget in parliament to watch the announcement of the verdict, which was broadcast live on public TV. When she addressed the plenum afterward, she tried to convince her critics to consider the big picture. “The euro is our guarantee for a united Europe," she said. “If the euro fails, Europe will fail. We won’t let that happen.”

The chancellor admitted that the current EU regulations were not sufficient to solve the crisis. Changes in the EU treaties would be necessary, she said, hinting at her discussions with French President Nicolas Sarkozy in August, which had ended in a common declaration to aim for further fiscal integration in the eurozone.

But it is exactly this deeper European integration that, according to the constitution court, would need better democratic legitimacy. Without it, the court said, there could be no pooling of debts in the eurozone. This appears to rule out the much-debated eurobonds, common bonds guaranteed by the whole euro area, and replacing individual state bonds.

In her speech, Merkel repeated her objection to eurobonds and insisted the ruling confirmed her policy of “responsible solidarity."

The chancellor now has two weeks to bring her fellow Christian Democrats and her coalition partners, the Free Democrats, in line before parliament votes on the expansion of the European rescue fund. Already weakened by poor results in recent local elections in her home state, she needs the full support of her parliamentary group to convince voters that she is still in control.