German court gives qualified support to participation in bailouts

European economies and investors dodged a major bullet Wednesday when Germany’s high court ruled that the nation’s participation in bailing out its debt-ridden neighbors did not violate the constitution.

But the judges warned the German government not to assume it had a blank check for more financial rescues. Instead, any future bailouts need the approval of lawmakers charged with overseeing the budget. The requirement could slow down efforts to address Europe’s growing debt crisis, which has regularly outpaced politicians’ ability to respond.

Still, the court’s qualified support for emergency aid to flailing Eurozone countries came as a relief to nervous investors. The region’s major stock exchanges closed higher Wednesday after steep losses in recent days driven by alarm that the debt crisis was spinning out of control.

Had the high court gone against expectation and declared bailouts unlawful, the effect could well have been of a bomb going off in the marketplace, instantly raising the specter of default for Greece, Ireland and Portugal. As Europe’s biggest economy, Germany is on tap for the lion’s share of the emergency loans those three nations have been granted in order to keep paying their bills.

“For the market it could’ve created a lot more uncertainty. It could’ve been a horrible day,” said Azad Zangana, chief European economist with the financial management company Schroders.

But the markets are unlikely to breathe easy for long. Serious concerns persist over the indebtedness of big European countries such as Italy and Spain, and the new demand that German lawmakers vet bailouts adds more bureaucratic cumbersomeness at a time when Europe’s leaders need to move more quickly to react to financial flare-ups.

“In future they’ll have to start debating these things much, much earlier domestically before taking the process forward. For that to happen, you’ll have to see better leadership,” Zangana said.

The court ruling came in response to legal complaints by German academics and others over Germany’s involvement in last year’s rescue package for Greece and over the setting up of a fund to help other debt-burdened Eurozone nations. Many Germans are angry about being on the hook for the mistakes and irresponsible decisions of other countries.

But the judges rejected arguments that the Greek bailout undermined the German parliament’s control over tax money.

In Berlin, Chancellor Angela Merkel hailed the decision as a victory for her government and told lawmakers that it was imperative that Germany defend the European single currency.

“The euro is the guarantor of a unified Europe,” Merkel said. “If the euro collapses, Europe collapses.”

Fear for the euro’s health has grown significantly in recent weeks, however, amid reports that Greece is falling far short of its budget-deficit reduction targets and that Italy is backpedaling on its own government austerity efforts.

Late Wednesday, the Italian Senate approved an austerity package that will increase the sales tax on some goods and services, raise the income tax for individuals who earn more than about $422,000 a year and speed up plans to boost the retirement age for women.

The measures had been the subject of rancorous dispute between the government of Prime Minister Silvio Berlusconi, lawmakers and unions, and there were signs that Berlusconi would back away from key provisions demanded by his own finance minister. Workers staged a nationwide strike Tuesday to protest spending cuts, a walkout that brought the country to a near-standstill.

But investors punished the government’s dithering by pushing up borrowing costs to painful levels in recent days, which concentrated official minds on putting together a credible austerity package and getting it through the parliament.

The lower house has still to vote on it.

In Athens, European Union officials and inspectors from the International Monetary Fund have warned the Greek government that it may not receive its next installment of bailout loans because of its laggardly implementation of promised reforms.

On Tuesday, Finance Minister Evangelos Venizelos told reporters that “Greece is not the pariah of the European Union” and tried to assure investors that Athens would follow through on labor and structural reforms.

A second rescue package for Greece was approved by leaders of the 17 Eurozone countries in July. But the deal must still be approved by national parliaments, which could prove difficult in countries such as Finland, where popular opposition to bailouts runs high.

henry.chu@latimes.com