Germany's Constitutional Court gave a green light on Wednesday for the country to ratify the euro zone's new bailout fund and budget pact, but insisted the German parliament have veto powers over any future increases in the size of the fund.
The eagerly awaited verdict boosted global stocks and the euro currency as investors breathed a sigh of relief that the euro zone's rescue fund for nations in crisis could soon take effect after months of delay.
Germany is the only country in the 17-nation euro zone that has yet to ratify the European Stability Mechanism (ESM), which is meant to erect a 700 billion-euro firewall against the spread of the three-year-old sovereign debt crisis.
"This is a good day for Germany and a good day for Europe," German Chancellor Angela Merkel said in a speech to parliament.
Rejecting injunction requests from 37,000 plaintiffs seeking to block the ESM and a separate pact on new budget rules, the court set two main conditions for the treaties to go ahead.
It said German liability in the rescue fund must be limited to 190 billion euros, the share set out in the current ESM treaty, and that any increase in that amount would require prior approval by the Bundestag lower house of parliament.
The court also ruled that a clause in the ESM treaty which seeks to keep decisions of the fund confidential "must not stand in the way of the comprehensive information of the Bundestag and of the Bundesrat (upper house)", meaning both chambers would have the right to be consulted on the ESM's activities.
These reservations must be attached to German ratification of the ESM, meaning the government may have to add a protocol to the rescue fund treaty.
President Joachim Gauck is expected to wait until this protocol is in place, and agreed with Germany's European partners, before signing off on the ESM. Experts said this could take several weeks.
"Fundamentally, the Constitutional Court has said that the ESM treaty can be ratified," said Kyrill-Alexander Schwarz, a constitutional expert at Wuerzburg University
"But the government must take steps to adopt the conditions set out in the verdict. President Gauck will probably not sign until a protocol is in place. He could do this first, but out of respect for the other ESM partners, he is likely to wait."
Jean-Claude Juncker, who heads the group of euro zone finance ministers, said the board of governors of the ESM would meet for the first time on October 8, a sign of optimism that the fund will be operational next month.
BAZOOKA
The ruling of the court, which is in the southwestern city of Karlsruhe, means the euro zone could soon have the two pillars of its crisis-fighting strategy in place.
A week ago, the European Central Bank announced that it was prepared to buy "unlimited" bonds from stricken euro zone members to reduce their borrowing costs. But its plan depended on the ESM going through.
"Within less than a week, the euro zone has finally received its long sought-after impressive bazooka: conditional but unlimited ECB bond purchases and the ESM," said ING economist Carsten Brzeski.
The euro hit a four-month high against the dollar following the ruling, and German bond futures fell to their lowest level since July.
Legal experts said the court's decision underlined Germany's commitment to deeper European integration despite the misgivings of the plaintiffs. They had sought to block the introduction of the ESM on the grounds that parliament's sovereign power over budget matters was being eroded.
The Constitutional Court, one of Germany's most trusted institutions, has earned a reputation as a thorn in the side of the European Union by delaying treaties to check their legality.
But Humboldt University law professor Mattias Kumm said the court had confirmed its understanding that "the basic commitment underlying the constitution is towards a united Europe".
German Foreign Minister Guido Westerwelle called the ruling "a smart move" and Economy Minister Philipp Roesler said it was "a good day for Europe".
"With this clear decision from the Constitutional Court, we came an important step closer to the goal of keeping the euro stable," Roesler said.
Still, some analysts expressed concern that the court's reservations could delay German ratification beyond a few weeks.
"It may require changes in the ESM treaty or a new side treaty to the ESM," said Guntram Wolff, deputy director of the Bruegel think tank in Brussels. "So my suspicion is that it will significantly delay the implementation of the ESM."
The court rejected an attempt by a eurosceptic German lawmaker to delay approval of the ESM because of ECB President Mario Draghi's bond buying plan. But the court said it would take a closer look at the bond purchase scheme at a later date.
"We can be very sure this has not been the last decision of the German constitutional court. The ESM is safe, but the role of the European Central Bank definitely is not," said Kai von Lewinski, a law professor at Humboldt University in Berlin.
(Writing by Stephen Brown and Noah Barkin; editing by David Stamp)
