Much of the effort to resolve the crisis hinges on the permanent ESM, which is designed to go into operation when the temporary European Financial Stability Facility is phased-out next year. The bailout fund would work in tandem with the European Central Bank's bond buying to lower yields for states such as Spain and Italy.

Last week, ECB President Mario Draghi said the ECB was ready to buy unlimited quantities of short-dated government bonds of nations signed up to rescues from the ESM or EFSF. While rejecting a last-minute request for an emergency injunction over the Draghi announcement, the court said it would review a challenge to the ECB bond-buying programs during additional hearings in the case.

Today's cases were filed after German lawmakers approved the ESM and the fiscal pact, a deficit-control treaty designed to impose budget discipline on European Union members. About 37,000 people signed up to endorse a constitutional complaint filed by political group “Mehr Demokratie e.V.” Other plaintiffs included opposition party Die Linke as well as Peter Gauweiler, a lawmaker from Merkel's CSU Bavarian sister party.

Transferred Power

The challengers, which sought an injunction against the bailouts while the court reviewed the cases in detail, argued the crisis-fighting legislation transfers constitutionally mandated authority from German lawmakers and undermines democratic rule.

The court ruled the ESM treaty must be interpreted in a way that bans it from borrowing from the ECB, since this would violate EU law. The ESM also can't be allowed to deposit bonds, including those acquired on the secondary market, with the ECB as collateral for loans, according to the judgment.

“Some uncertainties” about the limit on Germany's contribution to the ESM and the scope of the German parliament's say over the fund were reviewed as part of the ruling, Chief Justice Andreas Vosskuhle said when delivering the ruling. The judges also said Germany must make clear when ratifying that it won't be bound by the treaty unless these conditions are met.

“The relevant factor for adherence to the principles of democracy is whether the Bundestag remains the place in which autonomous decisions on revenue and expenditure are made,” according to the unanimous judgment.

Lawmakers must not allow Germany to shoulder an amount it can't control or that would result in it being unable to determine its political agenda, the court said.

“No permanent mechanisms may be created under international treaties which are tantamount to accepting liability for decisions by the will of other states, above all if they entail consequences which are hard to calculate,” the eight judges wrote.

For today's ruling, the court chose six cases. The judges only had to decide whether to halt ratification of the treaties while reviewing the suits more closely. The German judges heard oral arguments on July 10 from groups challenging the viability of the EU's fiscal pact and the ESM, which both houses of parliament approved with two-thirds majorities on June 29.

Previously, the court cleared each step of European integration. Last year, the judges cleared the Greek bailout and the EFSF, while saying Germany may not agree to take over unlimited future liabilities incurred by other EU member states.

Bloomberg News

Copyright 2018 Bloomberg. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.