A key guidepost is the Federal Constitutional Court's decision of Sept. 7. In this case, arguments were made that aid to Greece and the Eurozone's rescue package (EFSF, which will become the ESM in 2013) were constitutionally illegal. The argument was rejected and the rejection got the press. It was characterized as a victory for Chancellor Merkel. However, you need to read the fine print.
While the complaints were rejected, the Constitutional Court laid out a list of what was unconstitutional. I will quote the English translation of the press release.
First, you cannot decrease the current or future power of the Bundestag. The Court said:
"Article 38.1 GG protects competences of the present or of a future Bundestag from being undermined."
In other words, it is a problem to enter into an agreement that fundamentally diminishes the power of the Bundestag, either today or in the future. The Court also reiterates Articles 20.1 and 20.2, Article 79.3 GG, which make it clear that decisions on revenue and expenditure of the public sector remain in the hands of the Bundestag. This is so important that the Court uses the words
"fundamental part of the ability of a constitutional state to democratically shape itself."
Second, and this is the key passage:
"When establishing mechanisms of considerable financial importance which can lead to incalculable burdens on the budget, the German Bundestag must therefore ensure that later on, mandatory approval by the Bundestag is always obtained again. In this context, the Bundestag, as the legislature, is also prohibited from establishing permanent mechanisms under the law of international agreements which result in an assumption of liability for other states' voluntary decisions, especially if they have consequences whose impact is difficult to calculate."
This says that any agreement that has large fiscal implications must go back to the Bundestag.
It is unconstitutional to impose permanent facilities to bailout states that are in trouble because of their own actions. Here it is important to draw the distinction between "voluntary decisions" (Greece spending too much) and other circumstances, like a natural disaster.
So the EFSF is OK because the liability to Germany is limited by the amount of their contribution. This also explains why the Bundesbank president said that targeting a yield spread was illegal. It is hard to determine how much funding it would require to maintain that target.
Again, the EFSF and ESM are OK because there is clear limit on the amount committed and the limit is feasible for Germany. Most of the press reports focused on the fact that the Court mandated that the Budget Committee of the Bundestag needed to approve new committments.The Court said that section 1.4 of the Euro Stabilization Mechanism Act was unconstitutional because it said that government only needed to
"strive to reach an agreement"
with the Budget Committee. The Court said agreement was manditory.