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Germany’s highest court asked the nation’s president Joachim Gauck to delay ratification of the yet to be created permanent bailout fund (the ESM) for at least three weeks.Gauck has agreed to the delay despite support from all four of the main parties.
This delay in the ratification of the ESM is a setback for Merkel according to Nomura’s senior political analyst Alastair Newton:
“This is nevertheless being seen as something of a setback for Ms Merkel’s authority – albeit one which we believe may offer her some additional leverage dealing with eurozone partners by confirming the need for Germany to remain mindful of its own constitutional constraints in addressing the eurozone crisis.”
On the plus side, the ESM was expected to come into force July 1, and therefore isn’t needed just yet. The EFSF is in effect until mid-2013, and can fill in the gap unless an economy as big as Italy is on the brink of collapse and needs to avail of the bailout funds.
Moreover, Newton says in return for agreeing to a bigger fiscal stimulus and to promoting an EU-wide bank transaction tax, Merkel has won the support of the two main opposition parties the SPD and the Greens.
This should ensure that she has the two-thirds majority she needs in the legislature for the June 29 vote. Newton expects the ratification of the ESM to go through.
The bigger threat to Merkel is the challenge to the fiscal compact which would be a blow to “Merkel’s game plan and, therefore, eurozone stability,” according to Newton.
Left-wing party Der Linke is expected to ask the court to consider an injunction against the ratification of the fiscal compact on June 29.
The biggest issue here is that the compact would give the European Court of Justice (ECJ) powers to uphold and enforce budgetary limits if eurozone domestic parliaments tried to overturn or breach them. Newton says the court would likely do one of two things:
- It could impose an injunction on ratification of the fiscal compact which would likely result in a delay of several months
- It could rule that the compact is unconstitutional despite its prior passage through Germany’s legislature.
This would “amount to a serious setback in Ms Merkel’s eurozone strategy as well as risking further unsettling financial markets through a period of protracted additional political and legal uncertainty,” according to Newton.
These issues will further undercut the chances of any clear-cut measures coming out of the June 28-29 European Council meeting that could reassure financial markets.