German court to rule on bailouts

September 7, 2011 - 3:30 AM

FRANKFURT, Germany (AP) — The Constitutional Court could add new requirements on the German government to consult legislators on bailouts for heavily indebted countries that use the euro — provisions that could make the European Union's response to its debt crisis even more cumbersome.

The court is ruling Wednesday on a legal challenge to Germany's participation in the eurozone bailout fund. Analysts think it's unlikely to throw out all German aid for other euro countries, but may slap on added requirements to force Chancellor Angela Merkel to get legislators' approval for loaning more money.

Germany's parliament voted to join in the May 2010 bailout of Greece to keep it from defaulting on its debts, and to back the euro440 billion ($620 billion) European Financial Stability Facility with some euro147 billion ($207 billion) in loan guarantees.

Conservative legislator Peter Gauweiler and a group of professors who also sued to try to stop Germany from adopting the euro challenged the bailout and the facility in court, arguing that the bailouts violated the parliament's right under Germany's constitution to control spending of taxpayer money.

The court could also rule against entering into joint responsibility for other countries' debts, a ruling that could complicate any resort to jointly issued eurobonds, widely proposed as one solution to the debt crisis. Arguments were heard in July, and the ruling is being watched by financial market participants.

European officials' response to the debt crisis and fears that Greece — or another indebted country — will default have been criticized as too slow, and additional requirements to consult parliament could slow the fund's reaction time to the crisis.

European leaders agreed to increase the fund's flexibility at a July 21 summit, giving it the right to buy the bonds of financially weak governments, help recapitalize banks, and quickly loan money to countries before they get into a full-blown debt crisis.

But the changes have run into hurdles. Finland has demanded collateral from Greece for its contribution, leading to more negotiations; a junior governing party in Slovakia says no vote can be held until December.