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European Bailout Passes Court Test - Just Barely

The German Constitutional Court issued a warning to the government but let the bailout decisions stand.
By Amiel Ungar
First Publish: 9/8/2011, 8:13 AM

In the long-awaited decision by the German Constitutional Court, the government of Chancellor Angela Merkel and in a sense the entire European Union, staved off disaster.

The court gave them what is called in football-soccer a yellow card rather than a red card. This means that they remain in the European bailout game but must now proceed with further caution. The stock markets rejoiced.

It should be pointed out that the German Constitutional Court. in contradistinction to the American Supreme Court or the Israeli High Court of Justice. is much more circumspect about challenging government policy, particularly when its decisions can retroactively invalidate government commitments.

A ruling against the government would have recalled the previous bailouts and stopped the current bailout efforts, causing financial chaos and perhaps the collapse of the euro. It takes only a modicum of judicial restraint to refrain from taking such radical measures.

However the plaintiffs in the case – a group of professors and a member of Merkel's sister party the Christian Social Union of Bavaria -- could also take satisfaction in the ruling

"This was a very tight decision. But it should not be mistakenly interpreted as a constitutional blank check authorizing further rescue measures," the presiding judge Andreas Vosskuhle told plaintiffs, government officials and members of parliament in the courtroom in Karlsruhe.

From now on, continued the presiding judge, the German government will have to involve the Bundestag more closely, particularly its budget committee.

The government argued in court that it was responding to an emergency and therefore it could not hold the full consultations with the legislative branch. While the court narrowly gave the government the benefit of the doubt, it will not necessarily extend it in the future.

In the end, the court's decision may have already been anticipated by the German government that is facing a revolt in its own ranks against the bailout packages. The German government last week gave the Bundestag the right to veto future bailout agreements. Previously, the legislative branch could merely pass resolutions of disapproval.

This was the minimum price that the government had to pay to secure support for the expanded bailout mechanism.

In a sense the court decision will strengthen Chancellor Merkel against Brussels. Sometimes weakness can be turned into strength.

One CEU partners realize that the Chancellor has to sell a package to the legislators, they will try to make things easier. Merkel talked tough in rejecting euro bonds and called upon the European Union to engage in a fundamental rethink.

"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."