Professor Fariborz Moshirian

Plans for the Eurozone’s rescue fund are to go ahead, following a ruling by the German Constitutional Court at Karlsruhe. This was a much anticipated landmark ruling watched around the world, delivering a momentous decision with far-reaching implications for the euro’s future. It means Europe can finally sign the European Stability Mechanism (ESM) and fiscal pact.

The German Bundesverfassungsgericht Constitutional Court overturned a number of legal challenges aimed at preventing two crucial economy boosting tools into law.

The ESM was set to replace the temporary European Financial Stability Facility (EFSF) and should have been in place by the beginning of July. However it needed Germany’s share of the rescue money to function and that was really held up pending the court ruling.

The European Stability Mechanism is a fund backed by the 17 countries that use the euro, with those members paying 80 billion euro up front, and pledging 620 billion euro as a backup. Its purpose is to support countries that have got into financial trouble and just can’t borrow money on the normal money markets. The 700 billion would enable the fund to sell highly rated bonds.”

It is designed to come to the aid of debt-stricken countries such as Spain and Italy. The court’s rejection of thousands of injunctions from Germans objecting to participation in the European Stability Mechanism will help smooth the way for the Eurozone to attempt to contain the debt crisis.

The present turmoil in Europe may continue for some time to come, however I think major economies should avoid sinking into recession as long as European policymakers intensify their efforts to address the Eurozone crisis.

Professor Fariborz Moshirian is the Director of the Institute of Global Finance at the Australian School of Business.