German Court Ruling Avoids “Total Chaos Scenario”

Germany’s Federal Constitutional Court ruled in favor of the German government’s ability to provide financial assistance to other euro zone nations under the European Financial Stability Fund (EFSF), subject to certain conditions.

The court also rejected a series of lawsuits aimed at preventing Germany – which makes up the euro zone’s largest economy –  from providing emergency loan packages to debt-strapped nations.

However, the court noted “This was a very tight decision. But it should not be mistakenly interpreted as a constitutional blank check authorizing further rescue measures.”

Following the court’s decision, the euro initially surged to near 1.4150 against the U.S. dollar, as investors viewed the announcement as a net positive.  However, in late morning trading, the euro pared its gains against the greenback and was higher by just 0.5% at 1.4061.

Commenting on the news, Carsten Brzeski at ING stated that “Today’s ruling should bring some relief to financial markets as a total chaos scenario has been avoided, but it should not lead to euphoria…The ruling confirms our view that the German piecemeal approach on the debt crisis is not likely to change but eventually the German parliament will vote in favor of a second Greek bailout package and the beefed-up EFSF.”

German Chancellor Angela Merkel, had the following to say to the German Parliament in light of the court’s decision, according to Reuters: “We must make it very clear to people that the current problem, namely of excessive debt built up over decades, cannot be solved in one blow, with things like euro bonds or debt restructurings that will suddenly make everything okay.  No, this will be a long, hard path, but one that is right for the future of Europe.”

However, Horst Seehofer – the leader of Germany’s Christian Social Union, one of three parties in Merkel’s ruling coalition – was quoted as saying he could not rule out Greece leaving the euro zone.  ”I do not think that can be ruled out but I’m counting on the success of the path that has been taken with aid and consolidation efforts.”