UPDATE 3-German court removes hurdle to euro zone bailout fund
* Top German court gives conditional approval for rescue fund
* Court says lawmakers must be consulted on increase in ESM
* Decision boosts euro and global stocks
By Annika Breidthardt and Diana Niedernhoefer
KARLSRUHE, Germany, Sept 12 (Reuters) - Germany's Constitutional Court gave a green light on Wednesday for the country to ratify Europe's new bailout fund, boosting hopes that the single currency bloc is finally putting in place the tools to resolve its three-year old debt crisis.
In an eagerly anticipated ruling that has had investors on tenterhooks for months, the court in the southern city of Karlsruhe insisted the German parliament be given veto rights over any increase in Berlin's contribution to the 700 billion euro European Stability Mechanism (ESM).
But the strings it attached to its endorsement of the ESM and a separate European pact on budget rules were less onerous than many had feared. The euro shot up to a four month high against the dollar and global stocks rose to a five month peak.
"This is a good day for Germany and a good day for Europe," German Chancellor Angela Merkel said in a speech to parliament.
Germany is the only country in the 17-nation euro zone that has not ratified the ESM, an important tool to stem the crisis that has forced bailouts of Greece, Ireland and Portugal, and is now threatening big countries like Italy and Spain.
Had the court upheld complaints against the rescue fund by thousands of German plaintiffs it would have delayed its implementation or even doomed it, dealing a devastating blow to policymakers and sending markets reeling.
European Central Bank (ECB) President Mario Draghi announced plans last week to buy "unlimited" amounts of government bonds issued by stricken euro states like Spain and Italy in order to reduce their borrowing costs.
That plan fuelled optimism in the markets, but it was contingent on the ESM coming into force. Following Wednesday's ruling, German Finance Minister Wolfgang Schaeuble said he expected the rescue fund to be operational within weeks.
Jean-Claude Juncker, who heads the group of euro zone finance ministers, set a first meeting of the ESM's board of governors for Oct. 8, another sign of optimism that the fund will soon be up and running.
"The euro zone has got over another hurdle, and slowly but surely, the region is getting more stable, less risky," said David Thebault, head of quantitative sales trading at Global Equities in Paris.
Roughly 37,000 plaintiffs, including democracy advocates, lawmakers from Merkel's ruling coalition and others from a far-left party, had argued that the ESM amounted to an illegal transfer of sovereignty from Berlin to Brussels.
The court rejected the complaints as "largely unfounded" but did set two main conditions.
First, German liability in the rescue fund must be limited to 190 billion euros, the share set out in the current ESM treaty, and any increase in that amount will require prior approval by the Bundestag lower house of parliament, the court said.
Until now, Merkel has always succeeded in getting new aid measures through parliament, in part because of the support of opposition parties like the Social Democrats (SPD) and Greens.
Second, the court said a clause in the ESM treaty which seeks to keep decisions of the fund confidential "must not stand in the way of the comprehensive information of the Bundestag and of the Bundesrat (upper house)", meaning both chambers would have the right to be consulted on the ESM's activities.
The German government may now have to incorporate the court's reservations in some form of addendum or protocol to the ESM treaty, although this is not expected to take much time.
"These conditions are significantly less onerous than they might have been," said J.P. Morgan economist Alex White.
Spain and Italy, whose struggling economies are likely to be the main beneficiaries of the ECB's debt-buying programme, hailed the ruling, with Italian Prime Minister Mario Monti calling it "excellent news".
It represents a victory for Merkel, who has been forced to walk a fine line between helping weaker euro states and keeping her sceptical domestic audience on board ahead of a federal election one year from now where she will seek a third term.
The centre-right chancellor should now be able "to hold on to her domestically popular line of managing the eurozone crisis with a mixture of commitment and conditionality", said Carsten Nickel, a political risk analyst at Eurasia.
The Constitutional Court, one of Germany's most trusted institutions, has earned a reputation as a thorn in the side of the European Union by delaying treaties to check their legality.
But legal experts said the court's decision on Wednesday had underlined Germany's commitment to deeper European integration.
What the ruling does not do is remove the threat of further challenges down the road.
Peter Gauweiler, a eurosceptic lawmaker from Merkel's Bavarian sister party and one of the plaintiffs, hailed the ruling as "a very big success", in part because the court agreed to take a closer look at the ECB's bond buying plan at a later date.
"They are clearly not discouraging further lawsuits, rather the contrary," said Franz Mayer, a law professor at Bielefeld University.
Kai von Lewinski, a legal expert at Humboldt University in Berlin, said: "We can be very sure this has not been the last decision of the German constitutional court. The ESM is safe, but the role of the European Central Bank definitely is not."
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