The only catch is that the German parliament will have to approve any future increase in the country’s €190bn liability to the European Stability Mechanism (ESM), rather than leaders or officials making the call alone.
The constitutional court’s ruling sent markets soaring, as it removed one key obstacle to troubled governments like Spain and Italy requesting aid from the ESM.
And as the European Central Bank has told governments they must request this official aid before it will consider purchasing their bonds to give further support, the ruling is even more crucial.
“On the face of it, a substantial firewall is now in place to keep borrowing costs in Spain and Italy at manageable levels and hence prevent the Eurozone crisis from deepening,” said Capital Economics’ Jonathan Loynes.
However, he also added a note of caution.
“Spain is still holding out against asking the fund for help, for fear of the conditions likely to be attached. And more fundamentally, the ESM and ECB can only address one symptom of the crisis – high borrowing costs – rather than the underlying causes of chronically weak growth and cripplingly high debt.”
Nonetheless, markets rose as the hurdle was cleared, with stocks rising and government borrowing costs dropping.
The Spanish government’s 10-year bond yields fell another 6.7 basis points to 5.627 per cent, while Italy’s fell five basis points to 5.029 per cent.
Meanwhile Spain’s IBEX stock index rose 0.78 per cent and Italy’s FTSE MIB jumped 1.19 per cent.
However German government borrowing costs rose 7.4 basis to 1.62 per cent on the increased exposure to troubled governments.