GERMANY'S top court said the country's parliament should have a greater say over eurozone bailouts. This decision could make it more difficult for Chancellor Angela Merkel to act decisively as she tries to win domestic support for a larger German contribution to the bailout of Ireland, Greece and Portugal.
The Constitutional Court issued a ruling yesterday that rejected a series of long-running lawsuits aimed at blocking the participation of Europe's biggest economy in emergency loan packages but the court said the government must get approval from parliament's budget committee before granting such aid.
"This gives a green light for continued bailouts, which is the only track available to euro-zone leaders right now," said Fredrik Erixon, head of the European Centre for International Political Economy in Brussels.
The judges described that decision as "very tight" and warned it should not be mistaken as a "blank cheque authorising further rescue measures". The euro rose 1.1pc against the dollar in response but later eased back.
"Today's ruling should bring some relief to financial markets as a total chaos scenario has been avoided, but it should not lead to euphoria," said Carsten Brzeski at ING.
"The ruling confirms our view that the German piecemeal approach on the debt crisis is not likely to change, but eventually the German parliament will vote in favour of a second Greek bailout package and the beefed-up EFSF (European Financial Stability Facility)."
With Germany's ability to act quickly constrained, the eurozone's most indebted nations will scrambled to convince investors of their commitment to tackle their debt problems.
Doubts about the will of Italy and Greece to push through the austerity demanded by their partners have darkened the political mood in Europe and triggered renewed pressure in bond markets.
The head of the EFSF said Greece's IMF/EU programme was not working, it would not be able to return to markets as planned and its citizens might have to accept a decline in living standards.
"The objective (of EU/IMF aid) is clear, it is to buy time. This is now working in Ireland and Portugal but it is not yet working in Greece," EFSF head Klaus Regling said.
Ms Merkel offered her solution, saying a radical change in attitude was needed to resolve the two-year crisis.
"I'm convinced that this crisis, if a great crisis of the western world is to be avoided, cannot be fought with a 'carry on' attitude. We need a fundamental rethink," Ms Merkel said.
"We must make it very clear to people that the current problem, namely of excessive debt built up over decades, cannot be solved in one blow, with things like euro bonds or debt restructurings that will suddenly make everything okay.
"No, this will be a long, hard path, but one that is right for the future of Europe," she told parliament.
The leader of Germany's Christian Social Union, one of three parties in Ms Merkel's ruling coalition, was quoted as saying he could not rule out the possibility of Greece leaving the eurozone.
"I do not think that can be ruled out but I'm counting on the success of the path that has been taken with aid and consolidation efforts," Horst Seehofer, CSU chairman and Bavaria state premier, told 'Bild', the mass-circulation newspaper that has been leading a campaign against help for Greece.
Amid all the chaos, Reuters cited a eurozone official who said a deal giving new powers to the bailout fund would be ratified by all eurozone countries by the end of September -- a timeframe that had been put in doubt earlier when a government coalition member in Slovakia said its parliament would not vote until December at the earliest.
Meanwhile, Finance Minister Michael Noonan said rapid ratification of the EFSF's powers was essential but that the fund was still too small at €440bn.
"What's going on now are negotiations on how to retrofit the measures to protect the currency and a lot of progress has been made, but there's a lot more to be done," Mr Noonan said. (Additional reporting Reuters and Bloomberg)