September 12 2012

In the broadcast today: USD Outlook ahead of the FOMC Decision. As the markets anxiously await tomorrow’s announcement by the Federal Open Markets Committee, we prepare for the potential outcomes of the U.S. central bank’s meeting and explore how the Fed’s future monetary policy could impact the USD, we analyze the continuous rally in the EUR/USD currency pair, we take a look at the CHF and the NZD ahead of the Swiss National Bank and the Reserve Bank of New Zealand interest rate announcements, we keep an eye on the USD/JPY pair, we highlight the market’s reaction to the German court’s ruling on the European Stability Mechanism, the U.K. Jobless Claims, the German and French CPI, and the Euro-zone Industrial Production, we discuss new forecasts from Bank of New York-Mellon and Bank of America, and prepare for the trading session ahead.

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Germany’s highest court rejects complaint and approves ESM, but there are conditions- ruling explained. Merkel welcomes the decision. The latest from the Dutch election. Troika in Greece still not impressed. Euro rallies above $1.29…

Powered by article titled “German court approves bailout fund, with conditions – eurozone crisis live” was written by Graeme Wearden, for on Wednesday 12th September 2012 09.14 UTC


Greece to sell gambling stake; maybe lease islands

The Greek privatisation office has announced that it will start the process of selling its 29% stake in OPAP, the state gambling monopoly.

That follows pressure from the Troika, who aren’t impressed that Greece has made little progress in raising funds through asset sales. In its defence, the regular speculation about a Grexit hasn’t made it easy for Athens.

There’s also a report this afternoon that the Hellenic Republic Asset Development Fund has identified 40 uninhabited islands and islets that could be leased for up to 50 years.

The idea of Greece selling its islands has been knocking around for months, and is an understandably sensitive subject. But as reports, the plan is to definitely to lease the islands, not sell them forever:

The fund reviewed 562 of the estimated 6,000 islands and islets under Greek sovereignty. While some are already privately owned, such as Skorpios by the Onassis shipping heiress Athina Onassis, the state owns islands such as Fleves, which is near the coastal resort area of Vouliagmeni, and a cluster of three islands near Corfu. Andreas Taprantzis, the fund’s executive director for real estate, declined to name any of the islands.

Legislation needs to be passed to allow development of public property by third parties and reduce the number of building, environmental and zoning permits needed before the plan can proceed, Taprantzis said.

Outright sales have been ruled out because the returns for the Greek state wouldn’t be higher than a leasehold arrangement, he said. Greece will attract more investment if an island is turned into a resort, he said.


Dutch election update

Voting is continuing in the Netherlands today, with the polls closing at 8pm BST. An early exit poll should be released shortly afterwards, but it could take some time before the make-up of the next government is clear.

The latest polling had Mark Rutte’s right-leaning Liberals neck-and-neck with the left-leaning Labour party on 36 seats each, followed by the Socialist party in 3rd place and Geert Wilder’s Freedom Party in 4th.

Reuters inverviewed some early-morning commuters in Amsterdam as they prepared to vote, at a “still-closed art deco cafe by the railway platform”:

Nienke van Zaambeek, a psychologist, had voted for GreenLeft, saying she was worried about the impact of liberalisation in the health care sector.

“The influence of private companies is getting ever bigger, and the right-wing government has been in favour of more privatisation.”

The final days of campaigning became a two-horse race between Rutte, 45, a former Unilever human resources manager dubbed the “Teflon” prime minister because of his ability to brush off disasters, and the energetic Samsom, 41, a former Greenpeace activist whose debating flair wowed voters.


The Bank of England and the European Central Bank have agreed to extend their existing swap facility until September 2013.

The swap line, set up in December 2010, means the Bank of England will provide up to £10bn of sterling to the ECB, which it could then pass onto eurozone banks to ensure “sterling liquidity”.

So what does today’s extension mean? One reading is that there still concern within central banks that eurozone financial institutions could struggle to get access to sterling if the crisis escalates.

Economist Shaun Richards suggests it’s another sign that the eurozone crisis isn’t over, despite recent encouraging developments.


More Troika talks in Greece

Back to Greece where our correspondent Helena Smith says the
ever-energetic finance minister is meeting visiting inspectors from
the EU, ECB and IMF (amid today’s protests: see 14.01)

The talks come amid mounting resistance to the latest package of hard-hitting austerity measures the debt-stricken country’s “troika” of creditors is demanding in return for its next disbursement of aid.

We also hear that Troika officials have been rather surprised by the latest talk about Greece potentially handing Germany a bill for outstanding war reparations.

Helena writes:

After a raucous day of protest marches and rallies – capped by military personnel who have begun gathering in protest against the savage pay cuts outlined in the latest €11.7bn EU-IMF dictated austerity package — it’s back to the negotiating table for Greece’s finance minister Yiannis Stournaras.

Whether the economics professor will focus solely on the issue of the cutbacks is hard to tell. The new round of talks follow the finance ministry’s surprise decision to set up a “working group” from the state audit council to investigate whether Germany should make more war reparations for the Nazi atrocities inflicted on Greece during World War II.

The deputy finance minister Christos Staikouras who announced the move told parliament that “the case is still
outstanding, and as a country we reserve the right and possibility to manage it to a satisfactory conclusion.”
With Germany – and especially Angela Merkel its chancellor – now working overtime to repair strained relations with Greece, the step is believed to have been met with bewilderment by the visiting auditors.

Although long-standing, the issue of war claims has received renewed attention by the populist far right and left since the June elections elevated Antonis Samaras’ conservative-led government to power. Since the outbreak of Europe’s debt woes in Athens, there has been a noticeable increase in criticism of Germany for failing to fully compensate the crimes committed by Hitler’s forces during their occupation of the country — criticism that has become ever more acerbic at a time when the nation is being whipped into austerity by

Politicians insist that with accrued interest, the amount still owed would exceed that of Greece’s entire debt. Staikouras reiterated that while Germany had been ordered to pay some $7.5bn in lieu of acts that included a forced government loan, only around 115 million deutsche marks (€74m) had been given to Greek victims of Nazi crimes in the 1960s.


Key Points, and legal drama ahead…

Here’s a concise list of the key points in today’s German court ruling, via Open Europe:

• Cap of €190bn on German’s contribution to the European Stability Mechanism, which can only be overturned by the Bundestag

•Both houses of German Parliament need to be adequately informed about all ESM decisions – something which needs to be enshrined in “international law”

•Reinforced that Bundestag approval needed for all activations of the ESM

•Explicit ban on ESM borrowing directly from the European Central Bank

•The German Government can terminate ESM at any time, as recognised under “customary international law”

•In its full ruling, expected in early-2013, the Court will also consider whether the ECB’s bond-buying programme, the OMT, has transferred illegal degrees of sovereignty to the EU-level

The “explicit ban” on the ECB lending to the ESM is effectively a ban on the ESM being given a banking licence. That would in theory have allowed it to ‘leverage up’ its firepower, but was already seen as a non-starter….

…especially as the ECB has now agreed its unlimited bond-buying scheme, which would be activated alongside the ESM…

Open Europe also predicts more courtroom drama in the months, and years, ahead:

As the crisis piles on pressure for further EU integration – via a banking union and debt pooling – more court cases will inevitably follow.

There are plenty of potential legal pitfalls ahead including: direct losses for Germany on loans to Greece, ECB losses on Greek exposure, pooling of risk through bank resolution fund and backdoor Eurobonds through the OMT.


Some photos of today’s anti-austerity protests in Athens (see 11.54am) have just arrived:

This one shows anti-austerity protests blocking a street in the Greek capital:

One report states that around 2,000 teachers, hospital doctors and municipal staff have taken part in the protests.

Helena Smith, our Athens correspondent, tells me that military staff are expected to demonstrate later in the day.

This photo shows local mayors carrying a banner that reads “No”.

Demonstrators headed for the Athens parliament, which has been fenced off:


Opponents of the European Stability Mechanism protested outside the court today, as the picture above shows.


German opposition join Merkel in welcoming ruling

Frank-Walter Steinmeier, leader of the opposition Social Democrats, has expressed his relief that the ESM now has the green light thanks to this morning’s ruling (see 9.15am onwards).

Steinmeier told the Bundestag that:

The significance of this decision for the future of Europe cannot be underestimated.

That’s via my colleague Kate Connolly in Berlin, who reports:

The court had been under huge pressure not to torpedo the ESM, amid fears that it would cause the destruction of the Euro and have a chaotic effect on the global economy. Andreas Vosskuhle, the court’s president said “the economic and political consequences” of delaying the law’s introduction were “almost impossible to calculate reliably”.

A little light relief amidst the gravitas of an occasion which amounted to the most important ruling in the court’s 61 year history was offered by a slip of the tongue by Vosskuhle who called the petitions to block the ESM “justified” before changing it to “unjustified” after being corrected by a colleague, as peals of laughter filled the courtroom.

Update: Kate’s full story is now online here.


Germany’s finance minister, Wolfgang Schäuble, has said that the European Stability Mechanism could come into force “within a few weeks”, how the constitutional court has had its say.

That fits with Jean-Claude Juncker’s statement that the ESM‘s board of governors will meet for the first time on 8 October (see 11.01am).

And just to clarify one point. The ESM is described as a €700bn fund – that reflects the €80bn of capital that is being provided by euro countries, plus €620bn of guarantees.

The ESM will have a lending capacity of €500bn.


Dutch election latest

Voting is well underway in the Netherlands, in a general election triggered by the collapse of the last government over plans for budget cutbacks.

The election is likely to results in another coalition (thanks to the Dutch proportional representation system).

The latest polling suggested that the free-market VVD party of Prime Minister Mark Rutte was battling for first place against the center-left Labor Party led by Diederik Samsom.

We have some photos from the Netherlands.

Here, PM Rutte casts his vote at a polling station at the Hague:

This photo shows Geert Wilders, leader of the Freedom Party, collecting his ballot paper. One of his bodyguards is on the right.

Wilders brought down Rutte’s administration by deciding that he could not support cutbacks to bring the Dutch deficit down.

After voting, Wilders told reporters that:

It is an important day for Holland and a historical day, whether we stay independent or if we become a province of the European super state.

And here, Labour Party leader Diederik Samsom is interviewed by the media after voting.


Protests underway in Athens

Over in Greece there are yet more protests today, as unions step up strike action against the nearly €12bn package of budget cuts international lenders are demanding in return for the debt-stricken country’s next tranche of financial aid.

Helena Smith, our correspondent in Athens, explains:

Greece’s autumn of mass protests kicks off today as striking teachers, university professors, pharmacists, hotel staff, doctors, municipal employees and military personnel take to the streets in an outpouring of fury over the new round of salary cuts foreseen in the latest austerity package Greece is frantically trying to negotiate with its troika of creditors at the EU, ECB and IMF.

Irate workers began taking to the streets in a day of escalating
protest rallies causing traffic mayhem as boulevards off the
parliament building in central Syntagma square were closed off. Many carried banners decrying budget cuts that after two years of persistent pay and pension cuts, tax increases and benefit losses will they say reduce them to penury.

Unions presenting civil servants and private sector workers have promised the demonstrations are “just the beginning,” vowing to stage a general strike later this month when the controversial measures – the focus of fierce horse-trading with the troika and infighting in the coalition government — are brought to parliament for vote.



Angela Merkel has welcomed today’s ruling by the German constitutional court.

Speaking in the Bundestag right now, the chancellor said the court’s decision “provides security for German taxpayers.”

Merkel told MPs:

It is a good day for Germany, and a good day for Europe.

Merkel also urged the Bundestag to see the big picture, arguing that:

Germany can only do well if Europe does well.



Here are some more photos from this morning’s court ruling in Karlsruhe:

The president of the German Constitutional Court, Andreas Vosskuhle, reading the verdict:

Here, Peter Gauweiler (in the centre) of the German Christian Social Union arrives at the court. He was one of the people who brought today’s complaint, along with Herta Daeubler-Gmelin (on the left).

The group’s lawyer Dietrich Murswiek, is on the right.

The financial markets were glued to the developments in Karlsruhe:

And here’s a photo of the eight judges leaving the courtoom:


Read the verdict in English, or German

An English translation of the German constitutional court ruling is now online here.

The German original is here.

The verdict is the same in both, of course: that the European Stability Mechanism does not violate German law, but that Germany’s maximum exposure through the bailout fund must be capped at €190bn.

Furthermore, any changes to the ESM must be approved by the Bundestag.


Bailout fund’s board to meet next month

Jean-Claude Juncker, head of the eurogroup, has announced that the European Stability Mechanism’s board of governors will hold their first meeting on October 8, now that the German court has given its verdict.

So, we are finally on the verge of getting the permanent ‘bazooka’ agreed earlier this year.

Juncker’s full statement is online here (pdf).

Juncker added that the Fiscal Pact (which imposes controls on national budgets) will take a little longer. He said the treaty on Stability, Cooperation and Governance in the Economic and Monetary Union will also come into force once twelve euro countries have ratified it, but not earlier than 1 January 2013.


Today’s court ruling shouldn’t cause Angela Merkel a political headache, according to John Jungclaussen, London correspondent of Die Zeit.

He told Sky News that the German public should be quite relaxed because the judges have insisted on political accountability, and have imposed a limit on Germany’s exposure through the ESM (although this could be changed by a vote in the Bundestag).



The German court ruling came shortly after EC president José Manuel Barroso announced plans for a new regime of banking supervision across the eurozone.

Barroso’s call for European states to form a Federation has also attracted plenty of interest.

From Brussels our Europe editor, Ian Traynor, provides this analysis of this morning’s events:

The eurozone permanent bailout fund, the European Stability Mechanism, has been given a green light to come into force two months later than planned following the supreme court decision in Karlsruhe which arrived with much more lenient caveats than had been predicted. German liability cannot exceed the already agreed 190 billion unless the German parliament decides otherwise, the court ruled, untying Chancellor Angela Merkel’s hands.

The bailout fund can go ahead. And now there will be plenty of other fights about how and if to use it.

It accompanies the draft legislation proposed today by the European Commission creating the eurozone’s first common banking supervisor, the European Central Bank. In June, spurred on by the escalating Spanish crisis, EU leaders agreed on the need to break the destructive link between weak sovereigns and vulnerable banks deepening Europe’s debt crisis. They said the ESM should be used to directly capitalise banks rather than lending the money first to governments, but only on condition that eurozone banks were policed by the ECB.

Despite the court ruling, Germany will still be the main problem here. It opposes any “automatic” use of the ESM for recapitalising banks. Every such exercise will first need to before the German parliament. And some Germans say the ESM rulebook needs to be changed before it can be used in this way, a view dismissed in Brussels. The French and the Spanish want quicker and more automatic sue of the fund for weak banks.

Further down the road, the gameplan is also that the ESM becomes the eurozone banking resolution authority i.e. the money is used to restructure or wind up failing banks along with a resolution levy put up by the banks themselves in the aim of avoiding direct taxpayer-funded bank bailouts. The ECB does not want to take on this role although it will decide which banks need to be wound up or restructured.


Austria welcomes German court ruling

Austria’s chancellor, Werner Faymann, has welcomed the German constitutional court’s ruling that Europe’s new bailout fund was compatible with German law (subject to certain conditions).

Faymann called the decision:

an important step for the stability of the euro, and essential for the future of Europe.

Die Linke, the left-wing party which helped bring the complaint, is taking the court’s decision pretty well, with leader Gregor Gysi saying he was happy that the court had insisted on democratic safeguards.


The German court decision has helped Italy to pull off a successful debt auction.

The Italian debt agency sold €9bn of one-year bonds at an average yield of 1.692% (that’s the interest rate payable on the debt).

That’s sharply lower than the 2.768% Italy had to pay the last time. There was also decent interest in the auction, with 1.65 bids for ever bond on offer.

Bond expect Nick Spiro of Spiro Sovereign Strategy comments:

The key factors for Italy going forward are market sentiment and domestic politics. The former hinges heavily on what happens in Spain while the latter will be shaped by the severity of the downturn and the appeal of populism.

It is still possible, though unlikely, that Mr Monti may be urged to stay on as premier to maintain confidence.


What’s next?

In case you were in any doubt, the eurozone crisis is not over.

Today’s court ruling does mean we’ve cleared another hurdle, but attention will swiftly turn back to other issues.

Immediate concerns include: whether Spain and Italy will need help with their borrowing; whether Greece has done enough to receive its next aid tranche; and whether leaders can produce a credible growth plan (at a time when austerity packages are driving the economies of Greece, Portugal, Italy and Spain deeper into recession).

Jeremy Cook, chief economist at World First, comments:

While the immediate disaster has been averted this merely brings us back in line with the general trend of gradual, painstaking improvement in the Eurozone.

In lockstep with the ECB’s decision to go out and buy bonds these verdicts do have the ability to fix the Eurozone but only in time.

The economic will is there, the political will has been shown to be there, but all of this will grind to a halt if the peripheral nations do not request aid.

Draghi was clear that it is a pre-condition for buying of their debt and so while the market will be relieved, hurdles remain which will need to be jumped.


Another important element in today’s court ruling: the judges are going to consider the bond-buying programme announced last week by the European Central Bank.

German MP Peter Gauweiler asked the court to consider whether the Outright Monetary Transactions (OMT) plan was also a violation of German sovereignty, as it allows the ECB to buy unlimited quantities of eurozone sovereign debt.

Gauweiler’s complaint failed to postpone today’s decision, but it suggests there could be further action from Karlsruhe in the months ahead, as the judges examine whether OMT transfers German sovereignty to the ECB.


Angela Merkel is due to speak in the German parliament in 45 minutes time, in a debate on the 2013 budget.

The German chancellor is likely to show her approval of the court’s ruling. The session in the Bundestag could also show the political mood in Germany


Here’s some early reaction to the court’s ruling:

Sony Kapoor, director of the Re-Define thinktank, says the constitutional court has preserved the ‘status quo’ in Germany, by ruling that the Bundestag must give its approval to any extensions to the ESM.

The Open Europe think tank suggests the ruling may mean the Bundestag must consider the ESM again:

Matthias Kumm of Berlin’s Humboldt University told Reuters that the Court ruling is broadly in line with expectations:

It means that Germany will now be able to move forward and ratify the ESM, providing an additional clarifying interpretation of the conditions under which Germany can assume responsibility.

So in effect this means that the ESM can enter into force.

At present, the ESM has €700bn of firepower at its disposal. That would not be enough to fund a full bailout of both Spain and Italy, for example.

Channel 4′s economics editor, Faisal Islam, predicts drama in the Bundestag next year:


Today’s ruling is largely what had been expected (see our round-up of predictions), but there is still relief in the financial markets that the constitutional court has not accepted the complaint.

The euro has just hit $1.29 against the US dollar – a new four-month high, despite the conditions demanded by the judges.

Stock markets have also jumped into positive territory:

FTSE 100: up 14 points at 5806

German DAX: up 25 points at 7336

French CAC: up 5 points at 3542



By rejecting the complaint, Germany’s constitutional court has given the green light for Germany’s president to sign the €700bn European Stability Mechanism into German law.

That takes away the danger of the bailout fund being blocked.

But there are also some key conditions:

1) The court has rules that German liability to the ESM must not exceed €190bn without asking the Bundestag for approval.

2) Both houses of the German Parliament must be kept informed about how the funds within the ESM are deployed.



Breaking: German constitutional court rejects complaint about ESM, but with conditions…


Court president Vosskühle is rattling through the judge’s ruling. So far, he has only outlined the complaint and explaining the basis of the claims.

Our Berlin correspondent, Kate Connolly, says there’s real tension in the courtroom:

The euro fell sharply at the start of the announcement, only to bounce back once it became clear that Vosskühle had not announced the court’s decision yet.


Andreas Vosskühle, president of the constitutional court, is reading out the verdict now, outlining the complaint.

Bloomberg TV has a live feed, with translation in English.


The ruling should appear online here, at some stage…


All eyes turn to Karlsruhe, where the eight judges who sit on the German Constitutional Court are about to announce their ruling.



Euro edges up

The euro has climbed a little higher this morning ahead of the court ruling, hitting a new four-month high against the US dollar of $1.2885.

Stock markets are quiet, with the FTSE 100 down 6 points, the German DAX up 3 points, and the French CAC down 7 points.

Alice Ross, the Financial Times’ currency editor, suggests the euro could hit new highs if the court rejects the complaint:


Looking back to the ruling on the European Stability Mechanism….. the court ruling is due in 10 minutes, and you should be able to see it live here.

One important point: the constitutional court is ruling on the complaint , rather than the ESM itself. So if the judges say they have “rejected”, or “declined” the motion before them, that means they are saying that the bailout fund IS compatible with German law.


Barroso calls for European Federation of Nation States

The key message from Jose Manual Barroso’s State of The Union address this morning appear to be that closer integration (both political and economic) will steer Europe through the crisis.

The EC president declared that the EU needs to move towards “a federation of nation states”, with a new treaty needed down the line to achieve this deeper integration.


Talented chap, that Barroso. He’s able to talk and tweet at the same time.

Here’s early highlights of the EC’s President’s State Of The Union address (still being streamed):


Jose Manuel Barroso, president of the European Commission, is starting to give the State of the Union address in the European Parliament NOW.

You can watch it live here.

Barroso is expected to outline plans for Banking Union in the eurozone, along with a call for close political union. From the sound of his tweets in the past few days, he’s rather excited:


Media round-up

Here’s a round-up of the latest media coverage of the German Constitutional Court ruling (see 7.14am):

Germany Spiegel newspaper says there is “great nervousness” ahead of the ruling, which it dubs “Die 700-Milliarden-Euro-Entscheidung” (The 700-billion-euro decision):

Hardly anyone expects the three women and five men [judges] will rule the ESM is unconstitutional and stop the permanent euro bailout fund completely. But the question is what conditions the court might require.

German tabloid Bild asks: Was ist, wenn das Bundesverfassungs-Gericht heute NEIN sagt? (What if the Federal Constitutional Court now says NO?). If that happens:

World stock markets could collapse, [triggering] the beginning of a global economic crisis.

Our own Kate Connolly writes:

All eyes are on the constitutional court president, Andreas Vosskühle, who will deliver the historical verdict at 10am local time on Wednesday. Vosskühle, a quietly spoken 48-year-old lover of abstract art who eschews the limelight, is believed to support the growing concern in Germany that too much power is being ceded to Brussels. He once said the citizens of Germany “shouldn’t one morning wake up and find out that the people they elected have nothing to decide anymore”

The BBC’s Gavin Hewitt points out that the Court ruling has already delayed the implementation of the ESM by two months:

On Wednesday the eight judges of the Germany’s Federal Constitutional Court will put on their red robes and deliver key verdicts on two of the eurozone’s new structures. Some say it will be the most important decision in the court’s history.

Reuters agrees that the Court will probably impose some conditions on the German government:

Transferring too many powers to European institutions could be seen as violating a post-World War Two constitution and legal tradition that emphasises the sovereignty of parliament, intended to safeguard democracy after Germany’s Nazi past.

The court may ask head of state Joachim Gauck to attach a reservation to the treaties addressing concerns about respecting Bundestag powers to limit German financial liability.

The Financial Times says today is “Decision Day” for the bailout fund, and suggests several conditions that could be added:

Previous judgments have insisted on closer Bundestag control over EU legislation, but that has now been largely established. An alternative restriction to answer the complaint of “unlimited” German liability would be to require Mr Gauck to attach a proviso limiting Germany’s total exposure to the €211bn approved by the Bundestag.

Another suggestion made by the plaintiffs is that the court should insist on a termination clause being written into the treaties, allowing any member state to give notice to quit the agreements. If Germany were to insist on that, it would give other countries the right to abandon the fiscal compact and its German-inspired cast iron rules for budget discipline.

Finally the judges could set out limits on any further steps to provide German guarantees for its partners, such as jointly-guaranteed eurozone bonds.


What might the judges do?

Legal experts reckon that the German constitutional court will probably rule that the European Stability Mechanism is compatible with German law, subject to various conditions.

Those conditions could limit Germany’s maximum exposure through the ESM, or give MPs the right to approve spending through the bailout fund.

Around 37,000 German citizens have backed the motion, which was brought by the More Democracy movement. High-profile supports include one of Angela Merkel’s own allies, Peter Gauweiler, of the CSU.

The German government, though, believes the ESM is in line with the law.

Finance minister Wolfgang Schäuble has warned that there would be “considerable economic upheavals” if the bailout fund were stopped.


The Agenda

The German court ruling dominates a busy day for the eurozone crisis. Here’s an agenda:

Jose Manuel Barroso to deliver the annual “state of the union” address. 8am BST/9am CEST

Barroso’s speech will include details of Europe’s new plans for Banking Supervision.

German constitutional court ruling on ESM: from 9am BST / 10am CEST

Dutch general election: all day

UK unemployment: 9.30am

Eurozone industrial production for July: 10am


German Court rules on ESM – from 9am BST

Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

Germany’s top court holds the future of the eurozone in its hands this morning.

In under two hours time, judges at the constitutional court in Karlruhe will announce their ruling on whether Europe’s new bailout rescue fund, the European Stability Mechanism, is compatible with German law.

The issue: is Germany surrendering control of its own finances, and taking responsibility for other country’s lending, by signing up to the fund?

Critics say the sovereignty of the Bundestag is at stake.

If the judges approve the ESM and the fiscal pact (which puts controls on countries’ budgets), the eurozone will have a powerful new bazooka to deal with struggling member states.

But if the court rules against the ESM, then a key part of the eurozone’s resuce plan would be left in tatters.

A third option is that the court rules that the ESM is acceptable, but with certain conditions attached.

As my colleague Kate Connelly wrote from Berlin:

Most analysts agree that the judges, not wishing to go down in history as the court that brought down the German government, and the euro and plunged the world economy into gloom, are likely vote in favour of the bailout mechanism.

“I don’t think the court will strike down the ESM, because it wouldn’t like to be seen to be killing off the euro. Just as the German government doesn’t have the courage to do that, neither does the court. If it ruled that the government had adopted a wrong decision, it would cause a huge crisis of legitimacy in Germany,” said Gunnar Beck, an EU law expert at the School of Oriental and African Studies in London. “Never in the 60-year history of the court has there been an example of the court killing an essential piece of government policy.”

What he and other analysts believe, though, is that the court will choose a “middle way” – allowing the ESM to go ahead but not without insisting on tight limits and conditions that would affect the Bundestag’s decision-making procedures on future aid and further European integration.

The court should announce its decision at 9am, so we’ll bring you the ruling, reaction and analysis through the day — along with all the other key developments in the crisis. © Guardian News & Media Limited 2010

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