German court may delay Europe's new bailout fund

BERLIN Thu Jun 21, 2012 5:31pm EDT

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BERLIN (Reuters) - The German government and opposition reached a deal on Thursday on growth that will allow parliament to approve the euro zone's permanent bailout scheme next week, but Germany's top court may delay the rescue fund's start date.

No sooner had Chancellor Angela Merkel's government and the centre-left opposition announced a breakthrough in eight weeks of talks on how to stimulate growth and job creation in Europe than the constitutional court threw a spanner in the works.

The deal on growth gives conservative leader Merkel the support of the Social Democrats (SPD) and Greens in parliament on June 29 to approve her "fiscal compact" for budget discipline in Europe, as well as the European Stability Mechanism (ESM).

The ESM bailout fund was meant to come into effect on July 1, but draft conclusions seen by Reuters on Thursday for next week's summit of EU leaders showed they now aim to make it operational on July 9 due to delays in the ratification process in several euro zone countries, not only in Germany.

The ESM cannot go into effect without approval by Germany, the euro zone's biggest economy. Full ratification also requires the signature of the head of state, President Joachim Gauck, and a nod from the constitutional court in Karlsruhe.

The court did not block the ESM's predecessor - the European Financial Stability Facility (EFSF) - though it has insisted on fuller consultation with parliament on both bailout mechanisms.

But the country's top court in Karlsruhe said the treaty's complexity meant it would need more than just one day - Saturday June 30 - to check that the text abided by the constitution.

"We assume that the president will, as he has done before, comply with this request, and that the court will therefore have enough time to conduct an examination," the spokeswoman said.

The president's office later said Gauck would respect the court's request and would refrain from signing the ESM and fiscal compact laws before it has ruled on the bailout fund.

Merkel's coalition was nonplussed about the ruling.

"It makes no sense for Europe to hold up the ESM because Germany's constitutional court needs more time," said senior conservative parliamentarian Norbert Barthle, recommending that the court use a facility for making "express decisions".

"Given the critical situation in Europe at the moment, you don't need much imagination to figure out how things would develop if we had a still-stand for several months," he said.

NO EURO BONDS, PUSH FOR TAX

The most likely scenario is that the court simply delays the launch of the ESM - which Germany wants to use for a bailout of Spain's struggling banking sector - by a few days. Earlier this week the same court reprimanded the government for insufficient consultation of parliament on ESM, but the government said this slap on the wrist would not impact ratification.

The parliamentary leader of Merkel's conservatives, Volker Kauder, said German politicians had put aside their own party interests to come up with a growth deal that would contribute to stabilizing the euro and resolving the sovereign debt crisis.

The opposition had demanded growth and job-creation measures to ease the economic and social impact of Merkel's drive for austerity in her "fiscal compact", which has been agreed by 25 of the 27 members of the European Union.

The SPD and Greens made this a condition for their approval in parliament of the fiscal pact and the ESM. Merkel needs their votes on June 29 to get the required two-thirds majority.

The centre left has backed the chancellor on all emergency measures so far in the sovereign debt crisis, but has begun to crank up its opposition language ahead of federal elections in 2013, when Merkel is expected to seek a third term.

But the government rejected proposals from the centre-left - egged on by new French Socialist President Francois Hollande's victory - for the 17 euro zone states to issue debt jointly.

Merkel argues that "euro bonds" or other similar instruments would merely remove the incentive for underperforming euro zone member states to reduce their debts and deficits.

"There will be no mutualisation of debt. Debt redemption funds are not allowed either by the constitution or by European treaties, and that's why we didn't agree to implement them," Kauder told reporters.

The SPD said they had agreed with the government to push for a financial transaction tax in the European Union, if necessary starting with a smaller number of willing states.

"We agreed we will aim to tax financial markets according to the EU Commission's model of a financial market transaction tax, and we agreed that if this is not possible with all 27 EU states, then we will form a 'coalition of the willing' of at least nine states," said SPD parliamentary leader Frank-Walter Steinmeier.

The terms of the agreement in a document seen by Reuters showed the government and opposition wanted to tax all financial transactions if possible, and have European legislation ready this year for consideration by lawmakers in individual states.

The agreement states that the tax needs the participation of at least nine member states, would be based on a model proposed by the European Commission and should in particular target stocks, bonds, currencies, derivatives and investments.

(Additional reporting by Michelle Martin and Holger Hansen; Writing by Stephen Brown and Gareth Jones; Editing by Jeremy Gaunt)

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