Germany’s Federal Constitutional Court on Wednesday dismissed requeststo roll back the bailout decisions—specifically, Greece’s original rescue package and German EFSFparticipation. But the court didn’t handGerman Chancellor Angela Merkel a blank check either, ruling future bailout actions must be approved by the German parliament’s budget committee, consisting of 41 members.
Still, a more favorable ruling than could have come down. For example, many expected a higher hurdle—like the court ruling future bailout actions be approved by the entirety of the Bundestag (Germany’s parliament), which would have made agreement on future eurozone actions to backstop struggling members considerably trickier (and much, much slower).
The ruling also indicates the bailouts’ sizes thus far haven’t violated the Bundestag’s budgetary sovereignty (no word yet on where that threshold might be), but that the government and parliament only have the right to establish temporary and conditional liabilities. Which seemingly rules out measures some have discussed like eurozone bonds, which would essentially be a permanent form of debt issued and secured by eurozone governments.
All told, the ruling seems to pave the way for German approval later this month of the plan increasing the EFSF’s size and flexibility—likely a relief (for now) to many concerned about Germany’s willingness to continue its role as implicit eurozone lender of last resort. And also probably a relief to Chancellor Merkel, who’s faced increasing scrutinyand opposition from domestic parties—including some members of her own Christian Democratic Union—who object to Germany’s level of financial involvement.
Overall, markets largely breathed a sigh of relief Wednesday—action likely tied at least partly to the German court ruling.
Why just in part? There were other developments Wednesday—like strong German industrial productionand continued slow progress in employment recovery. And reaccelerating Australian GDPand improved US auto sales. Just a few examples of incremental positive news released recently, highlighting well an oft-overlooked fact: Markets are influenced by myriad factors—more often than not the ones that are little noticed or under-appreciated. You often read headlines attributing the day’s market movement to a single factor, maybe two at the most, like these: “US STOCKS—Wall St Advances 2 Pct as Europe Concerns Ease” and “US Stocks Advance on Speculation About Obama’s Package to Bolster Jobs.” And sometimes one factor does have an outsized impact on market moves in a single day. But far more often, the reality is markets are just so much more complex than that.
Above and beyond that, how important is it really to find attribution for a single day’s market moves? What’s more important for long-term, growth-oriented investors is focusing on the countless drivers moving stocks higher or lower over the next 12 to 24 months. Along that path, not only is there domestic news to consider, but in an interconnected, global market, there are innumerable international factors complicating things. And in a market like this year’s—with big volatility in both directions so far— it’s important investors don’t fall prey to dissecting a single driver seeking an explanation for what happened on a given Wednesday but instead focus more broadly on all available information, weigh it and look deeper than just what’s front-page news.
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