A German constitutional court has allowed the new European bailout fund, the European Stability Mechanism (ESM), to go forward, with only one condition that appears surmountable.
The European Union breathed a huge sigh of relief Wednesday after a German court ruled Berlin’s approval of taxpayers’ cash to aid its deeply indebted neighbors was not unconstitutional, paving the way for a rescue fund considered vital to containing the region’s debt crisis to come into existence.
But the notoriously activist judges of the Constitutional Court also set certain conditions, including one insisting that German liability to the $640 billion fund — to which Berlin is contributing about $240 billion — could not increase without parliamentary approval.
First of all, parliament would still have an opportunity to approve. More important, the size of that bailout fund, seen as too small in the event of a serious crisis in Italy and/or Spain, has become less significant since the European Central Bank took out its bazooka and made it clear that it would carry an unlimited balance sheet to lower sovereign debt yields in the troubled countries.
The reason why the German constitutional court decision matters at all is that the ECB’s Mario Draghi laid down conditions for his unlimited bond purchasing – countries who want this help would need to sign up with the ESM and officially request aid. Now that the ESM has been legalized, expect pressure along those lines for Spain and Italy to comply and sign up.
However, the urgency has dissipated for those countries. As an indicator, Spanish bond yields have fallen, with the 10-year note down to under 5.6%. That’s a drop from 6.85% a week ago. Without that urgency Spain won’t seek a bailout. And with all the bondholders recognizing that rising Spanish debt yields can be met with an ECB intervention, there seems to be little point at bidding them up.
The “all’s well that ends well” scenario, then, is for the bond yields to remain stable because of the announced mechanisms in place. However, that removal of the debt crisis does nothing for the continued economic crisis, which has to do with austerity measures and capital flows. Fixing that will require more fiscal integration and a tolerance for inflation.
In a separate matter in Europe, pro-euro parties appear to be on the road to victory in the Netherlands.