The FINANCIAL — All eyes are on Germany again this week for a decision that could prove decisive in the seemingly never-ending battle to save the euro.
Indeed, September could prove a pivotal month in market sentiment towards the beleaguered single currency.
Following the European Central Bank's decision last week to beef up its anti-crisis armoury — which triggered a strong rally in the euro and global stock markets — the German Constitutional Court will decide on Wednesday whether to give the green light to two other key crisis-fighting tools.
While polls suggest that the majority of Germans believe the Court should block both instruments, analysts predict it will not.
Instead, it could demand clarifications or legal amendments that might further delay ratification by a few more weeks, the analysts suggested.
At 10:00 am (0800 GMT) on September 12, the eight scarlet-robed judges of the Verfassungsgericht will decide whether German President Joachim Gauck can sign into law the European Stability Mechanism (ESM) and the European fiscal pact.
As EUbusiness reported, German parliament already voted in favour of both with a two-thirds majority at the end of June.
But Gauck held off from completing the ratification process in the face of a number of legal challenges filed by the far-left Die Linke party, a citizens' initiative group called "More Democracy" and a well-known eurosceptic from Chancellor Angela Merkel's CSU Bavarian sister party, Peter Gauweiler.
They argued that the ESM — the EU's permanent 500-billion-euro ($630-billion) rescue fund — and the fiscal pact were incompatible with Germany's "Grundgesetz" or Basic Law because they are effectively forcing Germany to surrender its budgetary sovereignty without the necessary democratic backing.
By committing Europe's biggest economy — and already its effective paymaster — to the ESM, parliament was essentially exposing Germany's public finances to unlimited risks should one eurozone country after another topple under the debt crisis, they argued.
And that meant German voters' basic democratic rights were being infringed upon.
The ESM, which will replace the temporary European Financial Stability Facility, should have been up and running by July 1. But it needs Germany's share of the rescue money to function and has thus been held up pending the Constitutional Court's ruling.
The court will not yet rule this week on the constitutionality of either the ESM or the fiscal pact.
It will simply decide whether to grant temporary injunctions sought by the plaintiffs that will prevent President Gauck from signing the legislation into law until a final ruling can be made next year.
If the court dismisses the plaintiffs' case, everything will be hunky-dory: Gauck can sign the legislation and the ESM can at long last become operational, much to the relief of the financial markets.
But if it grants the injunctions, it could trigger fresh financial turmoil as markets will take this as a sign the court believes that the ESM and the fiscal pact are incompatible with Germany's constitution, effectively killing off the ESM at birth.
Expectations ahead of the ruling are correspondingly at fever pitch, with doomsday scenarios doing the rounds that the euro may immediately break up.
A poll conducted by YouGov for the DPA news agency found that 54 percent of Germans believe the court should order a review of the parliamentary votes on the ESM and the fiscal pact. Only 25 percent of people say the court should give its green light.
But analysts believe the court will not block the crisis tools.
"All in all, the majority of legal experts appear to see little reason that any of the arguments brought forward against the ESM Treaty … may justify a rejection" by the court, said Barclays Research analyst Thomas Harjes.
"The new ESM is very similar to the existing EFSF. Any innovations, such as its new voting procedures or its permanent nature do not appear to justify a different ruling than the court's ruling last year when it found that the EFSF and the Greek aid programme acceptable under Germany's constitution," Harjes said.
Commerzbank analyst Eckart Tuchtfeld agreed.
"We do not expect the court to stop the ESM," he said. "Since a negative ruling would probably have serious consequences for the sovereign debt crisis, the court would surely have signalled an emerging rejection to the federal government to give it time to change its communication and look for alternatives," the expert argued.
Berenberg Bank chief economist Holger Schmieding said he saw only "a 20-percent risk that the court will decide against allowing the permanent ESM to replace the temporary EFSF."
More likely was that the court would allow Germany to ratify "but add its own very restrictive interpretation to the text," Schmieding said.
But even if the court were to reject the ESM, "it would not be the end of all efforts to contain the crisis," he argued.
"Between them, the temporary EFSF and the ECB would have virtually unlimited means to combat contagion if need be. But it could be a tense period," Schmieding concluded.
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