Recovery Watch: German court decision brings European rescue closer
It’s not often that SmartCompany covers goings on in the German court system, but today there was a decision that will have ramifications around the globe.
Essentially, Germany’s Constitutional Court has ruled against a host of challenges to the German government’s support of European Stability Mechanism (ESM) and an associated fiscal pact, both of which are designed to build a 700 billion euro “firewall” around the European debt crisis and stop stricken European nations from accumulating more debt.
The court ratification comes just days after the European Central Bank vowed to do whatever it takes to save the euro by stepping in to buy the bonds of struggling nations where it needs to.
There is a clear sense that Europe’s regulators and central bankers now have the firepower they need to start really attacking the European debt crisis. It’s a sentiment summed up nicely by ING economist Carsten Brzeski overnight.
"Within less than a week, the eurozone has finally received its long sought-after impressive bazooka: conditional but unlimited ECB bond purchases and the ESM," he said.
The positive impact of the news was seen on European bond markets (where Spanish bond prices rose and yields fell, reflecting greater confidence) and currency markets, with the euro hitting a new four-month high of $US1.2907.
Even the Australian dollar felt the impact of the court decision, rising to $US1.0500 from $US1.0475 – although, of course, a stronger Australian dollar isn’t great news for everyone.
Europe remains very much on its sick bed, and it’s worth noting that debt “firewalls” prevent further problems rather than immediately fixing current ones.
But I like the way Business Spectator and Eureka Report commentator Alan Kohler describes what’s happening in Europe as a process where risk is being gradually chipped away – it’s important to realise that every step takes us a little further away from the brink.
Hopefully the German court decision and the unlimited bond buying promise represent chunks of risk being removed and not just chips.