German Federal Constitutional Court gives the green light for the European Stability Mechanism and Fiscal Compact

On 12 September 2012, the German Federal Constitutional Court (the "Constitutional Court") cleared the way for Germany’s accession to the European Stability Mechanism ("ESM") and the Fiscal Compact. However, a condition to this accession is that any increase of Germany’s overall liability under the ESM must have the further approval of the German parliament. The requirements of the Constitutional Court will have to be met as part of the ESM’s implementation measures and by the European Central Bank ("ECB").

Background to the decision

Measures taken on the European level

EU member states decided at the beginning of 2012 to replace the temporary European Financial Stability Facility ("EFSF") with a permanent crisis solving mechanism, the ESM. Additionally, a Fiscal Compact was agreed. This required each contracting state to implement a debt ceiling to permanently consolidate its budget.

The ESM will have statutory capital of €700bn, of which Germany will contribute approximately €190bn (27%). The ESM may grant financial aid and loans to member states in financial difficulty in a total amount of €500bn. Such aid will be subject to strict and appropriate conditions, which will be agreed in a memorandum of understanding (MoU) with the member state seeking assistance.

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