The euro zone debt crisis cleared another hurdle last night with the German constitutional court ruling that Germany can go ahead and ratify the European Stability Mechanism (ESM). The ESM is the permanent bailout fund that will replace the European Financial Stability Facility (EFSF) from mid 2013.
The court’s clearance came with conditions. In particular the court has ruled that Germany’s financial liability should be capped at €190b with the Bundestag having veto powers over future increases in the Fund. Chancellor Merkel has already said as much so there is nothing really new here.
Once Germany has signed there is only Estonia still left to ratify the Treaty. Once that has occurred the signatories can then go ahead and raise the first tranche of paid-up capital of €80b.
This ruling clears another potential roadblock to a full solution of the euro zone debt crisis. More important than the bailout funds is the fact that the ESM is the first step in the process of euro zone debt mutualisation which we think will be an inevitable part of the future of Europe’s fiscal landscape.