German court backs ESM rescue fund in double-edged ruling

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The court capped Germany's ESM share at €190bn and ordered the government to "express clearly that it cannot be bound by the Treaty" if the limit is breached. This stops the ESM increasing Germany's share if Spain and Italy seek top-up funding.

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Volker Beck from the German Greens said the court had crippled the ESM, while Leipzig law professor Christophe Degenhardt said the eurosceptics had pulled off a coup. "Their main objective has been achieved," he told Der Spiegel.

The ruling kills off hopes of a banking licence for the fund so that it can boost its firepower by tapping the ECB, calling this "incompatible with the prohibition of monetary financing". Italian premier Mario Monti, the International Monetary Fund and Washington all argue that an ESM banking licence is crucial.

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The Bundestag "must individually approve" every big rescue package and is "prohibited from establishing permanent mechanisms based on international treaties which are tantamount to accepting liability for decisions by free will of other states, above all if they entail consequences which are hard to calculate".

This bans eurobonds, debt-pooling or fiscal union under the existing Basic Law. Any alienation of the Bundestag's budgetary powers would require a new constitution and a referendum.

"This is the key clause," said Hans Redeker from Morgan Stanley. "The court's ruling is 'back-loaded'. The consequences will hit later. For now we are living in a monetary paradise with the ECB ready to do some heavy weightlifting, so we think risk assets will continue to rally until Christmas. Then be careful."

The ruling stipulates that no ESM package for Spain and Italy can go ahead without a vote in the Bundestag, where bail-out fatigue is palpable.