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The Drama of the Euro Plays out in German Courts

By Paul Quintaro

Germany's highest court has begun hearing a challenge to the bailout agreements the country made with struggling Euro Zone member states, according to Reuters.

Ruling conservative politicians have argued that the bailout goes against the German constitution. While it isn't likely that the challenges will affect Germany's current bailout operations, this case may decide future precedent.

Some German citizens are upset with the country having to foot such a large piece of the bailout. The country's economic strength and wealth have made it the automatic lead donor for bailing out the weaker EU countries, but this role might have an uncertain future.

If the court rules that the bailouts are unconstitutional, it may completely prevent Germany from giving aid to any struggling European countries. This could weaken the market's perception regarding the strength of the euro.

With one currency representing multiple countries, the Euro might have unique problems in maintaining its strength.

Within a single government, like the United States, disagreement is tempered by the checks and balances of the federal government. With the European Union, the overarching laws of the EU might come into conflict with the individual laws of each country, creating hang-ups that would not exist in a single country, and possibly damaging the currency and confidence in the euro in a way that might never happen for the U.S. dollar.

Considering that Germany is the wealthiest member of the EU, whatever decision is reached will have a powerful impact on the broader European economic situation. Other countries may hesitate to help bailout Greece if they have to foot a larger portion of the bill. France's population could react extremely negatively to any additional burden that they would have to take on.

Mid-sized European economies might recoil from burdens that will impact their own economic vitality.

The ruling of the German high court could also set a precedent outside of Germany. Conservative action in Germany might invigorate political movements in other countries. The right-wing could be galvanized by a visible, public victory in this case. A victory would also rally conservative political clout within Germany, perhaps setting the tone for the fiscal future of the country.

If things play out in this way, disunity may be the new rule within the EU, and that could see euro weakening in the face of other currencies. With other problems simmering around the edges of the EU, a rash of bad news could drive down the currency in the markets.

However, with government officials, such as Finance Minister Wolfgang Schaeuble on the side of the bailout, there are allies of the plan to support Greece and other struggling EU members. Additionally, other countries may apply pressure to Germany to make decisions with a broader European interest in mind, and considering the interdependence of the EU, pressure may not go unnoticed.

With such a large economy and so many countries interested in the well-being of the euro, the German court's decision will play out in front of the intensive gaze of an international audience. Whether this next act sets the stage for tragedy or success depends on more than just the German judiciary. A significant portion of the world is invested in the euro, and the tension may run high as these economic crises continue to unfold.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.