Legal timebomb over ESM ticking in Austria too

VIENNA (Reuters) - A challenge by far-right politicians to Austrian ratification of the euro zone’s permanent bailout fund may provide another headache for leaders seeking to put a lid on the region’s debt crisis.

Germany’s top court is expected on Wednesday to rule that the European Stability Mechanism (ESM) and the budget pact that goes with it are compatible with its constitution and can go ahead, but impose tough conditions limiting Berlin’s flexibility on future rescues.

Austria’s small size means that any ruling against the ESM by its own Constitutional Court would not sink the rescue fund, which does not have to be ratified by all of the euro zone’s members to go ahead.

But it would put Vienna in a legal quandary and give ammunition to opponents of further bailouts for countries in the 17-nation European currency bloc’s struggling south.

Austria’s parliament ratified the agreement on the fund in July by a two-thirds majority - as required to amend the constitution - after the ruling coalition of Social Democrats and the conservative People’s Party secured backing from the opposition Greens.

That has prompted rightwing opposition parties which object to such bailouts in principle to seek to launch a constitutional court challenge to ratification via the regional government of Carinthia.

Leaders of the Freedom Party of Carinthia (FPK), the biggest party in the southern province’s ruling coalition, have said they intend to file a lawsuit arguing that Austrian taxpayers should not have to bail out indebted euro zone laggards.

A broader coalition of Austrian opposition parties has also threatened to fight in court the accompanying European fiscal pact that aims to reduce national deficits and debt.

The FPK in Carinthia, the home base of late far-right leader Joerg Haider, is allied with the national Freedom Party (FPO) headed by Heinz Christian Strache.

The party has even said it might agree to other coalition parties’ demands for early elections in Carinthia after corruption scandals that have severely shaken the province if they will back the lawsuit.

Gerhart Holzinger, the president of the Constitutional Court, told state broadcaster ORF on Sunday that if they succeed, Austria may need to renegotiate terms of the ESM.

He did not discuss the merits of any potential ESM case but said a successful lawsuit could leave Austria - and Europe - in legal limbo.

“We cannot abolish the ESM pact but we would only establish that the agreement of this pact was unconstitutional,” Holzinger said on a talk show.

“That would put the government and Austria as a whole in an extremely difficult situation because they would then have to either defy the constitution by some means or other, or to negotiate after the fact with the other parties to the pact, as was already the case in the EU context with some countries that had referenda.”

Opponents of the ESM and fiscal pact can file an Austrian legal challenge only once the measures have been published in the official gazette, a step that officials say will take place only when the two measures enter into force in Europe.

German legal experts and MPs said a new complaint against bailouts lodged with the country’s top court at the weekend by a lawmaker from German Chancellor Angela Merkel’s conservatives was unlikely to prevent the court from ruling this week.

The German court’s deliberations, which could determine the fate of the euro, have already held up the ESM for several months and any postponement of the ruling could unsettle financial markets and exacerbate the bloc’s three-year-old debt crisis.

Reporting by Michael Shields and Georgina Prodhan; Editing by Catherine Evans