Unlike the iPhone 5 announcement which left much to be desired, the German Constitutional Court did not disappoint market watchers as it allowed the European Stability Mechanism (ESM) ratification to push through.
Recall that this permanent bailout fund, which was set to replace the temporary European Financial Stability Facility (EFSF), faced strong opposition from a group of conservative German politicians before the German court ruled against the injunction. This means that German President Joachim Gauck will finally be able to sign the legislation necessary to back the ESM, which is a crucial component in solving the euro zone debt crisis.
It seems that euro zone officials and market watchers are making such a big fuss about the ESM and they’ve got every reason to. Not only is it an important part of European leaders’ plans unveiled during the EU Summit, but it’s also a component of the new bond buying program (Outright Monetary Transactions or OMT) announced by the ECB last week.
If all goes according to plan, the ESM will be able to secure 500 billion EUR in funds contributed by euro zone governments over a period of years and will eventually provide loans for financially-troubled euro zone member nations. Although this permanent bailout fund alone won’t be enough to eliminate the debt crisis in the region, it represents a step in the right direction when it comes to keeping their fiscal troubles contained.
Markets breathed a sigh of relief following the ruling. Although it was widely expected that the German Constitutional Court wouldn’t stand in the way of the ESM getting approved, the actual news of the approval was still positive news to investors. Heck, even German Chancellor Angela Merkel welcomed the news, saying that yesterday was “a good day for Europe.”
Consequently, the euro rallied to its 4-month highs against the dollar following the announcement. The ruling also helped lower 10-year Spanish bond yields to 5.60% and 10-year Italian bond yields to 5.06%.
Don’t get carried away and think that all is well in the euro zone. Although the court gave the go signal for the ESM, it still expressed reservations to Germany’s role in the bailout fund.
For instance, it capped the amount that the country would contribute at 190 billion EUR. That translates to 28% of the ESM and is roughly the same percentage that Germany’s GDP contributes to the region’s overall GDP. I don’t know about you but it seems to me that the court is saying that Germany should only pay for its share – nothing more, nothing less.
Ultimately, I think the court’s ruling yesterday shows that the euro survives for yet another day but it’s still on life support. The ESM and the ECB’s bond-buying program are mere band-aid solutions to the debt crisis. They do nothing more than just buy EU leaders more time to come up with a plan to fix the problem.
So until that happens, I’m not going to jump into the conclusion that everything is well and good for the euro.