Andreas Vosskuhle (4th right), president of Germany’s Constitutional Court, pronounces the verdict on the European Stability Mechanism (ESM) with his colleagues of the second senate, at the constitutional court in Karlsruhe yesterday. Germany’s Constitutional Court confirmed yesterday the legality of the eurozone’s bailout fund, upholding a preliminary ruling from the height of the debt crisis in 2012 that gave an initial green light to the ESM.

Reuters/Karlsruhe, Germany

Germany’s Constitutional Court confirmed yesterday the legality of the eurozone’s bailout fund, upholding a preliminary ruling from the height of the debt crisis in 2012 that gave an initial green light to the European Stability Mechanism (ESM).

The court reiterated that the €700bn ($975bn) fund did not violate the rights of the Bundestag lower house of parliament to decide on budgetary matters as long as the lower house of parliament had sufficient oversight powers over the ESM.

“The result is clear: the constitutional complaint...is inadmissible and on top of that unfounded,” said the president of the court, Andreas Vosskuhle, standing to read the verdict along with his red-robed colleagues in the courtroom.

“Despite the liabilities assumed, the budgetary autonomy of the German Bundestag is sufficiently safeguarded,” he told the court in Karlsruhe in south-western Germany.

The court said measures had been taken to ensure Germany’s liability to the ESM was limited to 190bn euros, with any increase subject to approval or veto by the Bundestag.

The more than 35,000 plaintiffs included academics and lawmakers from Chancellor Angela Merkel’s conservative bloc and the opposition, who argued that the ESM amounts to an illegal transfer of sovereignty from Berlin to Brussels. The Constitutional Court has a history of delaying EU treaties to test their compatibility with German law, usually reaching the conclusion that parliament has to be consulted fully and taxpayers’ liabilities must be limited.

As expected, Vosskuhle did not make any direct comments on the legality of the European Central Bank’s “unlimited” bond-buying scheme, the flagship emergency measure taken since the debt crisis began four years ago.

The German court took the unprecedented decision last month to defer a ruling on the ECB’s Outright Monetary Transactions (OMT) programme — which is credited with saving the eurozone — to the European Court of Justice in Strasbourg.

The ECJ is seen as less of a threat to the OMT, which was announced by ECB chief Mario Draghi in 2012 and helped to keep the eurozone together by promising potentially unlimited purchases of the sovereign bonds of member states.

The German court could still give its own verdict after an ECJ ruling, which is likely to take over a year. It has already said there was good reason to think the OMT exceeded the ECB’s mandate and violated a ban on the ECB funding governments.

Christian Schulz, an economist at Berenberg bank, said it would have been a major surprise if the Constitutional Court had contradicted its own preliminary verdict from 2012.

“It’s important that we have certainty about the legality of the ESM in the eyes of Karlsruhe because it is central to the financial stability architecture of the eurozone,” he said.

But the court had “created much bigger trouble” with its negative comments on the OMT in February, “because without that, the ESM is simply too small - it is not big enough to defend countries like Spain and Italy”, said Schulz.

Gunnar Beck, a Eurosceptic law expert at London University, said the ruling did not alter his view that the ECJ and German court “might compromise and limit the OMT while allowing the ECB to engage in quantitative easing on an unprecedented scale”.

ECB watchdog tells Europe to prepare to shut ‘zombie’ banks

Eurozone countries must prepare to shut their failing “zombie” banks and quickly pool the money to do it, the bloc’s top regulator said yesterday, ahead of a warts-and-all investigation of its still-fragile financial system.

Daniele Nouy’s comments, including her plea for countries to form a united front in solving the problem, give an early indication of how the bloc’s chief banking supervisor intends to tackle issues that show up in health checks this year.

They may also influence talks between European lawmakers to finalise the second pillar of banking union — the launch of an agency to close bad banks and a fund to help cover the costs. This would go hand-in-hand with European Central Bank supervision of the sector.

“The banks that have to disappear are ... the zombie banks,” the ECB watchdog chief told lawmakers in the European Parliament, referring to banks that are so laden with bad loans that they are unable to give fresh credit.

“I hope that action needed will be taken and we will not have any more zombie banks,” she said.

Almost seven years since German small-business lender IKB became Europe’s first victim of the global financial crisis, the region is still struggling to lift its economy out of the doldrums and banks are taking much of the blame for not lending.

Nouy, formerly a French regulator, warned that countries needed to do more to jointly back a new fund to pay for the closure of zombie banks, in order for the wider scheme of controlling banks to work.

Negotiators from the European Parliament and EU countries are trying to finalise a new regime along those lines this week.

Nouy is now leading a 1,000-strong team sifting through tens of thousands of banks loan, health checks that economists see as the last chance to draw a line under the crisis.

She said countries need to prepare to shut laggard banks and should club together in supporting a fund to pay for closures. “We need solid ... public backstops,” Nouy said.

“Just like a fire brigade needs access to water ... the SRM (Single Resolution Mechanism to cope with failed banks) needs access to a resolution fund.”

This fund is due to be built up to roughly €55bn ($76bn) over a decade, using levies from banks.

But it has shortcomings as it stands.

It is small and will initially be made up of a patchwork of country funds without the government backing that would allow it top up borrowings more easily and cheaply.

Nouy said barriers between national funds in the scheme should be broken down within five years rather than ten as planned, allowing countries to help each other if they faced a problem bank too big to cope with alone.

She urged governments to back up the fund to allow it borrow, warning that the fund would be “quickly depleted” by bank closures in its early years.