The Federal Constitutional Court's decision allows President Joachim Gauck to sign off on the German parliament's ratification of the treaty that sets up the European Stability Mechanism bailout fund a financial weapon that leaders of the 17 countries using the euro hope will help calm the debt crisis that threatens the eurozone and the global economy.
The decision means the eurozone governments finally have two robust financial defenses against the debt crisis in place. The bailout fund will takes its place alongside plans by the European Central Bank to buy unlimited amounts of short-term government bonds issued by troubled countries.
The ESM can support countries by loaning them money, while the ECB bond purchases could lower the painfully high borrowing costs that are threatening Italy and Spain. Additionally, the ESM is also expected to join in purchasing bonds to support the ECB effort.
Stocks across Europe rallied strongly on the ruling, the euro spiked to a four-month high of $1.2906 and the borrowing rates of troubled economies, such as Spain and Italy, eased further.
European officials said the fund now expects to hold its first directors' meeting next month.
Chancellor Angela Merkel welcomed the court's decision. "Today, Germany is once again sending a strong signal to Europe and beyond: Germany is assuming with determination its responsibility as the biggest economy and as a reliable partner in Europe," she told Parliament in Berlin hours after the ruling.
"This is a good day for Germany and it is a good day for Europe," she said.
The ESM wouldn't have been able to start work without Germany, its No. 1 contributor.
The court did, however, insist that Germany has to secure legal guarantees that Parliament must vote on any further increases in its contributions to the ESM. These guarantees must be secured before Gauck signs the fund into law—though that did not appear likely to be a major issue.
Opponents—including several politicians and a pressure group that claimed 37,000 people had signed up to its complaint—had challenged Germany's ratification of the ESM, arguing it violated the country's constitution. They had sought an injunction preventing Gauck from signing the legislation—and also sought unsuccessfully to block the so-called fiscal compact, the budget-discipline pact pushed by Merkel and signed by most European Union countries.
Gauck's office said in a statement that he plans to make a decision on signing the legislation into law "as soon as possible" but it isn't yet possible to specify a date. Government lawyers are still poring over Wednesday's verdict to determine whether Germany's law needs to be changed before the ESM is signed off by the President, or if a separate international accord is enough to satisfy the court's demands.
Once Germany's ratification has been sent to Brussels, it's up to European finance ministers as the governors of the ESM to spell out formally the guidelines for the rescue fund's operation—including the upper limit for each country's liability—before it can begin operation.
The court's decision came just days after the European Central Bank unveiled a plan to buy government bonds of struggling countries if they apply to the eurozone's bailout funds.
Yet both the ESM and the ECB bond purchases are stopgaps. They can give governments time to reduce their deficits and cut debt long-term by reforming their economies so they can grow faster. The question is, whether the countries will use that time—or delay once the pressure is off, as they have during previous lulls in the crisis.
"Within less than a week, the eurozone has finally received its long sought-after impressive bazooka," said Carsten Brzeski, an economist with ING in Brussels.
"As a result, Eurozone governments have now received more time to do their homework, implement reforms and austerity measures," he added.
Germany is liable for about 27 percent—about (EURO)190 billion—to the overall European bailout program totaling (EURO)700 billion, which includes the ESM and remaining money from the current temporary fund, the European Financial Stability Facility.
The supreme court's chief justice, Andreas Vosskuhle, said the case posed "special challenges"—not least because the financial and political consequences of a possible delay were "almost impossible to estimate reliably."
The court still has to deliver a full ruling on the substance of the plaintiffs' complaints. But Vosskuhle made clear that his court's ruling on the calls for a temporary injunction—delivered after two months of deliberations—reflected the likely outcome of the case expected early next year.
"The examination showed that the laws that have been challenged with high probability do not violate the constitution," he said.
Still, he said Germany must get legal guarantees before ratification that the provisions of the ESM can't be interpreted in such a way that Germany's financial liability could be increased without the approval of Berlin.
Germany must also ensure that provisions in the ESM treaty demanding "professional secrecy" from fund employees don't stand in the way of the German Parliament being informed in full about fund decisions.
Wednesday's ruling was in line with previous rulings in which the Federal Constitutional Court has approved European political and financial integration, and eurozone rescue measures, while insisting that the German Parliament's right to have an early and thorough say on them be safeguarded.
Vosskuhle said it wasn't his court's job to decide on the "usefulness and sense" of measures approved by a large majority of German lawmakers.
"No one can say for sure what measures are actually the best for Germany and the future of our united Europe in the current crisis," he said. He insisted, however, that "only as a democratically legitimized community governed by the rule of law does Europe have a future."
In attaching strings to Germany's ratification, the court gave some satisfaction to the plaintiffs. Herta Daeumler-Gmelin, a former justice minister who represented some of them in court, said it was important that the court clearly set limits on German liablility and reaffirmed Parliament's right to have a say.
"I am not unhappy with this decision," she said.
David Rising and Geir Moulson contributed from Berlin.