Good week for the euro - but also a warning

Stephanie Flanders
Former economics editor


The German chancellor says it's a "good day for Germany and a good day for Europe". Better than that, it's been a good week.

First, the European Central Bank delivered on its pledge to do more - possibly quite a lot more - to hold the euro together. Now the German constitutional court has ruled in favour the new European bailout fund, the ESM.

Cue sighs of relief in financial markets around the world. But there's an irony in both decisions which should not be lost on the financial markets or Europe's politicians: the institutions that seem to be most keen to put control over the future of the euro into the hands of the voters are the ones that are least accountable to them.

This is quite clear in the case of the German constitutional court's judgement. As expected, there were conditions attached to the court's decision to allow the ESM to go ahead: Germany's potential liability must remain at the current level of 190bn euros (£152bn; $245bn).

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Anything more, and the government has to go to parliament for approval; and both German houses of parliament, not just the Bundestag, have to be informed about everything involving the ESM.

There's nothing here that will come as a surprise to Chancellor Merkel. Nor will it prevent the ESM operating broadly as expected. That is certainly what the financial markets have concluded.

A quick reminder of the nuts and bolts: the deals that have been done by European governments in the past year give the EFSF and ESM a combined capacity of 700bn euros - about 300bn of which has already been committed to the Greek, Irish and Portuguese bailouts and helping the Spanish banks.

Germany's 27% share in the ESM when it fully takes over from the EFSF in 2014 will come to just under 190bn euros. I don't think any serious politician - in Germany or anywhere else - believed it would be possible to increase Germany's liabilities without returning to national parliaments.

In their judgement, the judges also stated that "borrowing by the ESM from the European Central Bank" would be incompatible with EU law, but investors don't seem concerned by this, either.

In the past, it's true that some had suggested that granting the ESM a banking licence would enable it to increase its lending capacity, because it would then be able to borrow directly from the ECB.

But in a recent speech in Austria, the prospective head of the ESM, Klaus Regling, said flatly that was wrong. "It's a wrong assessment… the lending capacity of the EFSF is fixed and the lending of the ESM is fixed."

All that a banking licence would do would be to make it easier for the ESM to borrow up to that limit. And anyway, any change in the structure of the fund that did have the effect of raising the fund's potential lending capacity would have to be ratified by parliaments.

So, the German constitutional court has not caused havoc. It has allowed the current strategy for saving the euro to continue.

But it has underscored that Germany's leaders should not be seeking to "get around" the voters in their solutions to the crisis. Whatever schemes they might come up with to hold this project together, if they can't make the case to parliament - and the voters - they should not be making it at all.

Something similar can be said of the ECB's new policy, which commits "unlimited" resources, but still clings to conditionality as a way to put the responsibility back into the laps of the politicians.

Martin Wolf deftly makes the point in his latest column for the FT: "The ECB is saying that it will seek to eliminate the threat of a break-up, except when this threat is most real, which is, of course, precisely when the country is failing to meet policy conditions. Investors know that electorates might choose a government that has no intention of sticking to agreed conditions. What happens then?"

Ultimately the decision whether to "do what it takes" to hold the euro together is a political one, which the ECB, understandably enough, wants to be taken by politicians, not the central bank. In a democracy, those politicians, in turn, should be accountable to the voters. Germany's constitutional judges surely feel the same way.

The ECB and Germany's highest court have done their bit to save the euro. The question they've left unanswered is whether Europe - and especially Germany's politicians - can do what it takes to persuade the voters that the single currency is worth saving.