German Court Clears Crucial Bailout Fund

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Germany's top court has ruled that the EU's 500bn euro (£400bn) bailout fund does not violate the country's constitution.

The Constitutional Court overturned a raft of legal challenges against the European Stability Mechanism (ESM) fund and related European fiscal pact, ruling that it can be signed into German law.

Although it did outline some conditions, including a cap on Germany's share of the ESM at 190bn euros (£152bn) unless a higher amount is cleared by parliament.

The news calmed investors worried that a ruling to the contrary would have stopped the EMS (SNP: ^EMSY - news) being implemented, as Germany is its largest contributor.

The euro rose to a four-month high against the dollar, and European markets also reacted positively.

German chancellor Angela Merkel said it was a "good day for Germany and a good day for Europe (Chicago Options: ^REURUSD - news) ".

"Today, Germany is once again sending a strong signal to Europe and beyond: Germany is assuming with determination its responsibility as the biggest economy and as a reliable partner in Europe," she said.

The taxpayer-backed fund is crucial in containing the eurozone's economic crisis because it can loan money to struggling governments that are unable to borrow elsewhere.

But opponents in Germany argued that it violated the country's constitution, and sought an injunction preventing the president from signing the legislation.

The court's decision came after the president of the European Commission made his so-called state of the union address to the European Union (EU) parliament.

Jose Manuel Barroso said EU countries needed to realise they are in the financial crisis together, and must work with each other to get out of it.

Closer political and economic integration is needed, he said, adding that the EU should become a "federation of nation states".

Mr Barroso also proposed that the European Central Bank should become the single supervisor of all 6,000 banks in the eurozone.

"Securing the stability of the euro is the most urgent challenge," he said, and setting up a single bank sector regulator is an essential response.

He added that coordinated supervision was an "absolute priority today because it is the basis for better managing banking crises".