Germany's high court on Wednesday upheld the country's participation in emergency measures to fight the eurozone debt turmoil, but ruled that lawmakers had to vet future plans to commit taxpayer money, potentially slowing decision-making in a fast-moving crisis.
The court said Germany's agreement last year to take part in the financial bailout of Greece and to set up a eurozone rescue fund was legal. That's a relief to markets because the country is the biggest contributor of loan guarantees to troubled nations like Greece.
But it also said parliament had the right to decide how taxpayer money is spent and that the government could not commit to more emergency expenses without asking the budget committee of the Bundestag lower house first.
That means new bailouts could take more time to be agreed and the rescue fund, the European Financial Stability Facility, could be slower to wield its new powers.
Eurozone governments have agreed to let the fund buy government bonds of shaky countries or lend money quickly to governments before they get into a fullblown crisis. But to stay ahead of market developments, the fund needs to be able to act quickly.
"Today's ruling suggests that future aid packages might be even more difficult to muster," said Jennifer McKeown, analyst at Capital Economics.
The decision by the Federal Constitutional Court had been closely watched by global investors in case the bailouts were rejected outright as illegal, a result few analysts expected because it would undo months of work by governments to contain the crisis and have a catastrophic impact on market sentiment.
The attention lay mostly on what restrictions the court would place on the government's future ability to fund eurozone rescue measures.
President Judge Andreas Vosskuhle said parliament had to play an active role and could not simply serve as a rubber-stamp for the chancellor.
The court did not impose, as some feared, the harsher requirement that emergency packages be approved by the full parliament.
Instead, it took a middle path, requiring the government to consult only the parliamentary committee before committing substantial new funds. The current bailout law allows the government to consult the budget committee after the fact in some cases.
The ruling was a minor victory for Chancellor Angela Merkel, who told parliament that the judges had "absolutely confirmed" her government's policies.
"The Federal Constitutional Court said personal responsibility and solidarity, naturally with the absolute approval of the parliament, is the way," Merkel said.
In an impassioned defense of the 17-nation euro, she told lawmakers that the euro meant more to Europe than just a common monetary zone, saying that no countries with a shared currency had ever gone to war with one another.
"The euro is the guarantor of a unified Europe," she said. "If the euro collapses, Europe collapses."
The bailouts are unpopular in Germany, where they are seen as endangering the country's more solid finances to help less responsible governments out of trouble they caused themselves.
In a rushed vote, Germany's parliament agreed to join in the May 2010 bailout of Greece to keep it from defaulting on its debts, and to back the euro440 billion ($620 billion) European Financial Stability Facility with some euro147 billion ($207 billion) in loan guarantees.
The suits were filed by conservative legislator Peter Gauweiler and a group of professors who challenged the bailout. They argued that parliament's budgetary rights were undermined by the country's participation in the bailout packages, among several other arguments rejected by the court.
European leaders agreed to increase the bailout fund's flexibility at a July 21 summit, giving it the right to buy the bonds of financially weak governments, help recapitalize banks, and quickly loan money to countries before they get into a full-blown debt crisis.
But the changes have run into hurdles. Approval by national parliaments was delayed by August vacations. Finland has demanded collateral from Greece for its contribution, leading to more negotiations, while a junior governing party in Slovakia says no vote can be held until December.
Even when the rescue fund is approved, the German court's ruling on Wednesday could hinder its smooth functioning.
"Risks remain before the EFSF can be allowed to grant pre-emptive loans to non-programme countries, to intervene in the bond market or to support the banking sector," Frederik Ducrozet, economist at Credit Agricole, said.
The slow approval process has left the European Central Bank as the only backstop against the crisis spreading to Italy and Spain. The bank has been buying the bonds of both countries to keep market interest rates from soaring and pushing them into financial disaster, a job it expects the EFSF to take over as soon as possible.
David Rising and Kirsten Grieshaber in Berlin and Angela Charlton in Paris contributed to this report.