Court challenge threatens new crisis over plans to rescue euro

The German parliament has approved both the E500bn (£402bn) rescue fund, the European Stability Mechanism, and the budget pact – the so-called fiscal compact, a cherished project of Chancellor Angela Merkel.

But opponents have asked the Federal Constitutional Court for injunctions blocking the plans while judges consider whether they are in line with German law.

Germany’s president Joachim Gauck has agreed not to sign the legislation before the court rules. The ESM cannot take effect without Germany’s approval.

The fund was initially meant to be operational from this month, and European policy makers still hope it can replace its temporary predecessor, the European Financial Stability Facility, by the end of the month. According to plans agreed at an EU summit last week the ESM is meant to handle the billions Spain has been offered to recapitalise its ailing banks.

The hearing will be held next Tuesday in Karlsruhe.

If the court issues an injunction, the ESM’s ratification could be delayed by many months, dealing a blow to the 17-nation eurozone’s crisis management. Should the court side with the government, in turn, the legislation would be allowed to go ahead, and a full hearing and verdict on the case then would not come until a few months later.

In previous similar cases, the court has sided with the government and has thrown out attempts to block timely legislation.

Those calling for the injunctions include the parliamentary caucus of Germany’s ex-communist Left party, a group led by a dissident MP from Merkel’s conservative centre-right block and a pro-democracy initiative that has gathered 12,000 signatures.

They maintain the treaty on fiscal discipline limits the German Parliament’s ability to control the country’s budget. On the ESM, they argue that it lacks proper democratic oversight and that the potential liabilities for German taxpayers are “irresponsible”.

Confirmation of the forthcoming hearing came as new figures showed unemployment within the eurozone has been edging higher for over a year as concerns over the debt crisis and the future of the euro weighed down on economic activity.

There are huge disparities across the eurozone. The highest unemployment rate across the eurozone was recorded in Spain, where 24.6 per cent of people were out of work in May. Even more dramatically, 52.1 per cent of the country’s youth were unemployed.

Other countries are doing better. Germany’s unemployment rate, for example, stood at only 5.6 per cent. However, a series of surveys have pointed to tougher times ahead.

Across the wider European Union, which includes non-euro countries such as Britain and Poland, unemployment edged up to 10.3 per cent in May from 10.2 per cent the month before.

At a summit last Friday eurozone leaders agreed a set of short- and long-term measures to shore up the euro and unveiled a limited economic growth package. Markets have responded positively with a stock market rally which, if sustained, should help buoy economic confidence.

Unemployment is expected to rise further as the eurozone teeters on the edge of recession.

Howard Archer, chief European economist at IHS Global Insight said: “With the eurozone likely having suffered appreciable GDP contraction in the second quarter and in grave danger of contracting again in the third, and with eurozone business confidence generally low and fragile, the likelihood is that the eurozone unemployment rate will move significantly higher over the coming months.”