German court seen okaying EU bailout fund, strings attached
* Constitutional court rules on ESM and fiscal compact
* German law experts see the treaties being approved
* Court may condition Merkel's response to euro crisis
BERLIN/KARLSRUHE, Sept 12 (Reuters) - Germany's Constitutional Court is expected to give its approval on Wednesday to the euro zone's new bailout fund while insisting on guarantees to safeguard German parliamentary sovereignty and limit Berlin's financial exposure.
Chancellor Angela Merkel remained tactfully quiet as the court kept policymakers and markets on tenterhooks for months, delaying the European Stability Mechanism (ESM) and fiscal compact to check that they comply with German democratic rules.
But Finance Minister Wolfgang Schaeuble blurted out last week he was "sure" of victory over the 37,000-odd plaintiffs, who include eurosceptics from Merkel's centre-right coalition and Left Party hardliners opposed to European integration.
If the court in Karlsruhe were to defy expectations an uphold injunctions against the bailout fund in its 10 a.m. (0800 GMT) ruling, it could devastate bond and currency markets and plunge the euro zone into turmoil by depriving it of funds to keep debt-laden southern states afloat.
But legal experts believe the eight judges in the court's Second Senate will back the treaties, based on its previous rulings that have allowed integration while insisting on full consultation with the Bundestag (lower house).
"The constitutional limits for surrendering sovereignty are not set in stone but open to interpretation, meaning economic, social and political circumstances can be taken into account," said Tanja Boerzel, a law professor at Berlin's Free University.
"A 'No' from the court on the ESM could have not just fatal consequences for the euro, but could also spark a constitutional crisis as the Bundestag and Bundesrat (upper house) ratified the ESM and fiscal pact with constitutional majorities," she said.
The ESM was supposed to come into effect in July as a 700 billion-euro firewall to stop the three-year-old debt crisis from spreading. Only German ratification is still pending: the fund needs approval by countries representing 90 percent of its capital base, and Germany's share is more than one quarter.
GAME-CHANGER FOR EURO
Some economists warn against failing to price in the risk, however small, of the injunctions being granted. Opinion polls suggest this would go down well with Germans weary of bailouts.
"Either way, Wednesday's decision will be another game changer for the euro zone, showing the legal limits to bailouts and further integration," said ING economist Carsten Brzeski.
The ESM's fate is tied to the other big hope for solving the crisis: the European Central Bank (ECB) buying Italy and Spain's debt to bring down their borrowing costs. ECB chief Mario Draghi has made clear such action requires the involvement of the ESM.
But his promise of "unlimited" bond-buying has struck a raw nerve in Germany, outraging some of Merkel's more eurosceptic allies and prompting a last-minute attempt to delay the ESM ruling with a fresh complaint to the Constitutional Court.
On Tuesday, the court rejected the lawsuit by lawmaker Peter Gauweiler from the Bavarian Christian Social Union (CSU), sister party of Merkel's Christian Democrats (CDU).
If he refiles the complaint, it could delay or upset the ECB plan. Karlsruhe has no jurisdiction over the ECB but could force Germany out of the euro if the ECB were deemed to fail in its obligations to be independent and to focus on a stable currency.
Bielefeld University law professor Franz Mayer saw Tuesday's rejection of Gauweiler's case as a good sign that the treaties would be approved, as it suggested the judges "are well aware of the consequences of their decisions in the euro context".
While Germany's central bank has criticised Draghi's bond-buying plans, Merkel backs him.
Despite neither being an elected body, the Bundesbank and the court are two of Germany's most popular institutions, entrusted with safeguarding democratic and economic stability.
But the euro crisis has accelerated the rate at which new EU financial legislation clashes with German economic and legal concepts. In previous rulings, the court has said integration is approaching the limits allowed by the current "Basic Law".
Transfering too many powers to European institutions could be seen as violating a post-World War Two constitution and legal tradition that emphasises the sovereignty of parliament, intended to safeguard democracy after Germany's Nazi past.
The court may ask head of state Joachim Gauck to attach a reservation to the treaties addressing concerns about respecting Bundestag powers to limit German financial liability.
"Such a solution would enable the ESM to take effect. At the same time, Peter Gauweiler would be proven right in a crucial point and the Bundestag's right to control the budget would remain protected," said fellow CSU MP Thomas Silberhorn.
There have been suggestions Germany might need to hold a referendum to change the constitution, although few experts see Karlsruhe giving a clear signal that it needs one. A referendum would complicate Merkel's expected bid for a third term a year from now.