German Court: Euro-Zone Bailout Packages Need Parliamentary Approval

Germany’s (NYSE:EWG) top court rejected a series of lawsuits aimed at blocking the nation from participating in emergency loan packages, but said the government must now get approval from parliament’s budget committee before granting aid to other euro-zone economies. The Constitutional Court’s decision gives the country’s parliament a greater say over euro-zone bailouts, which could hurt Berlin’s ability to act decisively against debt crises plaguing the region.

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While the court’s decision does not prevent the euro zone’s largest economy from contributing to relief efforts, it’s not the decision many had hoped for, and could still hinder Chancellor Angela Merkel’s ability to push through plans meant to stabilize neighboring economies and their shared currency. “The ruling confirms our view that the German piecemeal approach on the debt crisis is not likely to change but eventually the German parliament will vote in favor of a second Greek bailout package and the beefed-up EFSF (euro-zone rescue fund),” said Carsten Brzeski at ING.

The ruling will constrain Germany’s (NYSE:EWG) ability to act quickly, and with Italy and Greece being stubborn about pushing through austerity measures demanded by their partners as a condition of their bailout funds, the political climate in Europe is cooling and the economic outlook for the region is darkening. Italy’s government had to push through higher taxes Tuesday amidst mass street protests led by tens of thousands of strikers. Earlier this summer, thousands of public and private sector employees took to the streets in Athens to protest austerity measures that would drastically cut spending.

In fact, Greece’s unwillingness to commit to even more austerity measures, required of the nation as a condition of its receiving a new aid payment, prompted lawmakers in Merkel’s party to call for Greece to be ejected from the 17-nation currency area. The head of the European Financial Stability Facility (EFSF) said Greece’s IMF/EU program was not working, that the country would not be able to return to markets as planned and that its citizens would likely have to accept a decline in living standards. “The objective [of EU/IMF aid] is clear, it is to buy time. This is now working in Ireland and Portugal but it is not yet working in Greece,” said EFSF head Klaus Regling.

German Chancellor Angela Merkel has been calling for a radical change in thinking if they are going to resolve the two-year crisis that has even stalled growth in Germany, the first euro-zone country to pull itself out of recession. “I’m convinced that this crisis, if a great crisis of the western world is to be avoided, cannot be fought with a ‘carry on’ attitude. We need a fundamental rethink,” said Merkel. “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,” she said before parliament.

But ejecting Greece from the euro zone is not being ruled out, according to Horst Seehofer, head of Germany’s Christian Social Union, one of the three parties in Merkel’s ruling coalition, though he is “counting on the success of the path that has been taken with aid and consolidation efforts.” Meanwhile, the Italian (NYSE:EWI) Senate will give a vote of confidence Wednesday that should see its latest austerity measures passed into law just ahead of Thursday’s meeting of the European Central Bank governing council, which has been pushing Rome to act.

Public resistance to new austerity measures is on the rise in countries facing the cuts while the public in less at-risk countries are angered by the taxpayer-funded bailouts. The ECB is counting on euro-zone governments to assume the role of bond-buyer once the EFSF receives new powers agreed to by euro-zone leaders in July, but national parliaments will have to approve the changes, and with aid packages becoming increasingly unpopular among member states with fewer economic problems of their own, getting approval of the new measures will be a challenge.

Euro-zone officials were originally expecting the deal giving new powers to the bailout fund to be ratified by all euro-zone countries by September, but already Slovakia has said its parliament will not vote until December at the earliest. Finland is demanding collateral from Greece in return for new loan guarantees, Merkel’s job is in jeopardy if enough of her conservative allies vote against a stronger EFSF in a parliamentary vote scheduled for September 29, and Ireland’s finance minister agreed that the new EFSF powers should be quickly ratified, but says the fund is too small at 440 billion euros.

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