The German Constitutional Court delivered excellent news Wednesday morning: the world as we know it will not be ending after all.
More accurately, the judges rejected a petition to block German participation in the Eurozone’s €500 billion bailout fund, the European Stability Mechanism. I don’t need to tell you that the stakes were high.
Had the court ruled the bailout fund unconstitutional under Germany’s Basic Law, it is highly likely that the entire Eurozone would have come unraveled. Germany directly accounts for nearly 30% of the bailout monies pledged. But more importantly, Germany’s leadership is what gives the entire scheme credibility. You remove Germany, and the entire structure falls down like a house of cards.
ECB chief Mario Draghi has long cautioned that central bank operations would not be enough to save the euro. Ultimately, it would depend of Europe’s politicians to build the institutions and take the actions needed to prevent the “irreversible” currency block from disintegrating.
The Court’s ruling further neutralizes Jens Weidmann, the President of the German Bundesbank, who had emerged as the highest profile critic of German support for the weaker euro members (see “The 5 Most Important People in the Eurozone”). With the Court supporting Angela Merkel’s plans, she will have wider latitude to act, at least until the next German election next year.
Meanwhile, legendary hedge fund manager George Soros has weighed in on the matter, telling Germany to “lead or leave” the Eurozone in a recent Financial Times interview.
“Either throw in your fate with the rest of Europe, take the risk of sinking or swimming together, or leave the euro, because if you have left, the problems of the euro zone would get better,” Soros said, adding that “it is entirely dependent on Germany’s attitude.”
It’s hard to imagine Europe “getting better” without Germany, but Soros has a point. The current German obsession with austerity for austerity’s sake is making the depression condition in Europe worse. Germany’s worries about the ECB stoking inflation during a period of record unemployment and debt deflation is tantamount to fiddling while Rome burns (or perhaps more accurately Madrid).
In any event, the Court’s decision removes the last remaining roadblock to what I expect to be a blow-out fourth quarter. As I recently wrote, the “Risk On” switch was flipped with Mario Draghi’s bond-buying announcement last week. Investors who have been sitting on the sidelines should take this as an opportunity to jump back into the game.