After weeks and week of delay, Germany’s top Constitutional
Court has ratified the European Stability Mechanism - the eurozone’s
permanent bailout fund. The court ruled that the ESM does not conflict with the
German constitution and Italian PM Mario Monti has today stated that this “has
removed the last obstacle for the implantation of the ESM treaty and the fiscal
compact treaty.”
There are a few ‘buts’ though, which probably means Monti is
jumping the gun a little. Whilst the ESM treaty does oblige the German government
to contribute €80bn up front and further contributions upon bailout requests
down the line, the German court has limited Germany’s contribution to €190bn.
This is a significant condition and may prove to be insufficient given the
refinancing needs of Spain and Italy. Italy could potentially decide to it is unable to contribute to the ESM due to the state of its own finances - Germany is unlikely to step willingly into the void. In addition, the court rejected granting the ECB a banking license and in doing so highlighted a continuing lack of firepower.
However, Germany's liability could be increased with the
approval of the Bundestag, though such approval seems unlikely given the
momentum of bailout-fatigue sentiment among the electorate. Another condition was
included that both German House of parliament must be kept informed of ESM
decisions, which does have the potential to delay future decisions.
The ESM’s governing board will meet in early October for the
first time but Eurogroup head Juncker has said it will not be activated before
January 1, 2013. The euro has rallied again today, focusing on the disaster that
was avoided rather than the considerable issues that remain. The euro may be to climb a little
further on the back of a QE3 announcement tomorrow evening but it is fair to say this
rally is looking increasingly overextended.
Richard Driver
Currency Analyst
Caxton FX
