The Federal Constitutional Court in Karlsruhe dismissed motions that sought to block the European Stability Mechanism, while ruling Germany’s 190 billion-euro contribution can’t be increased without legislative approval. The court said Germany can ratify the ESM if it includes binding caveats that it won’t be forced to assume higher liabilities without its consent.

“We are an important step closer to our goal of stabilizing the euro,” German Economy Minister and Vice Chancellor Philipp Roesler told reporters in Berlin after the ruling today. “It has always been the goal of this government” to establish a “clear limit and to include parliament in all important decisions.”

The legal challenge had delayed efforts by Merkel and other euro-area policy makers to stem the region’s debt crisis. In the neighboring Netherlands, Prime Minister Mark Rutte, a Merkel ally, is seeking re-election today. Stocks and the euro rose after the ruling. The single currency gained 0.37 percent to $1.2902 at 2:21 p.m. in London, while the Stoxx Europe 600 Index rose0.5 percent.

Spain, Italy

Much of the effort to resolve the crisis hinges on the permanent ESM, which will succeed the temporary European Financial Stability Facility. While the ESM will be the main rescue vehicle once it’s up and running, the EFSF’s remaining funds will be available until mid-2013 to ensure a fresh lending capacity of 500 billion euros. The bailout fund would work in tandem with the European Central Bank’s bond buying to lower yields for countries such as Spain and Italy.

The ruling is “another big step toward defusing the euro crisis,”Holger Schmieding, chief economist at Berenberg Bank, said in a note to clients. While the debt crisis isn’t over yet, a “gradual return of confidence could enable the German economy to rebound by the end of the year from its current stagnation and the euro zone to start expanding gradually in early 2013.”

Last week, ECB President Mario Draghi said the ECB was ready to buy unlimited quantities of short-dated government bonds of nations signed up to rescues. While rejecting a last- minute request for an emergency injunction over the Draghi announcement, the court said it would review a challenge to the ECB bond-buying programs in the remainder of the cases, including possible oral arguments before the end of the year.

Budget Discipline

Today’s cases were filed after German lawmakers approved the ESM and the fiscal pact, a deficit-control treaty designed to impose budget discipline on European Union members. About 37,000 people signed up to endorse a constitutional complaint filed by political group “Mehr Demokratie e.V.” Other plaintiffs included opposition party Die Linke, as well as Peter Gauweiler, a lawmaker from Merkel’s CSU Bavarian sister party.

The challengers, which sought an injunction against the bailouts while the court reviewed the cases in detail, argued the crisis-fighting legislation transfers constitutionally mandated authority from German lawmakers and undermines democratic rule.

“Some uncertainties” about the limit on Germany’s contribution to the ESM and the scope of the German parliament’s say over the fund were reviewed as part of the ruling, Chief Justice Andreas Vosskuhle said when delivering the ruling. The judges also said Germany must make clear when ratifying that it won’t be bound by the treaty unless these conditions are met.

Banned Borrowing

The ESM treaty must be interpreted as banning the fund from borrowing from the ECB or depositing bonds as collateral, the court said, because EU law doesn’t permit the central bank to buy government bonds on the secondary market with the intention of financing EU member state budgets independently of the capital markets.

“The relevant factor for adherence to the principles of democracy is whether the Bundestag remains the place in which autonomous decisions on revenue and expenditure are made,” according to the unanimous judgment.

Lawmakers must not allow Germany to shoulder an amount it can’t control or that would result in it being unable to determine its own political agenda, the court said.

“No permanent mechanisms may be created under international treaties which are tantamount to accepting liability for decisions by the will of other states, above all if they entail consequences which are hard to calculate,” the eight judges wrote.

For today’s ruling, the court chose six cases. The judges only had to decide whether to halt ratification of the treaties while reviewing the suits more closely. The German judges heard oral arguments on July 10 from groups challenging the viability of the EU’s fiscal pact and the ESM, which both houses of parliament approved with two-thirds majorities on June 29.

Previously, the court cleared each step of European integration. Last year, the judges cleared the Greek bailout and the EFSF, while saying Germany may not agree to take over unlimited future liabilities incurred by other EU member states.