Germany’s constitutional court has approved a new European bailout mechanism and fiscal pact, striking down a raft of legal challenges aimed at preventing a euro-wide bailout fund and a new fiscal pact from becoming law.

The Federal Constitutional Court met on Wednesday in Karlsruhe to rule on whether to allow Germany to join the European Stability Mechanism (ESM) – a new, permanent $638.8bn bailout fund for the 17 countries that use the euro.

Al Jazeera’s Nick Spicer, reporting from Berlin, said the decision is a victory for the European Union and German Chancellor Angela Merkel.

“It’s an easier day in the eurozone. People are breathing a little easier and I think you see that in the way the markets are reacting right now,” said Spicer.

“On a philosophical level they provide the credibility that the markets are looking for because the Deutschmark [former German currency] is the core currency in Europe.”

The taxpayer-funded reserve would be crucial in fighting the European debt crisis, as it would allow access to funds for troubled governments who would not otherwise be able to borrow.

The fund would not have been able to work without the participation of Germany, the largest and most stable economy currently in the eurozone.

The ESM treaty was approved by a two-thirds majority in the German parliament.

Opponents, however, challenged it in court. They said that joining the fund would amount to ceding German parliamentary oversight over how taxpayer money is being spent.

The court’s decision has paved the way for Joachim Gauck, the German president, to formally ratify the ESM and European fiscal pact.

Merkel has remained quiet on the issue as the court kept policymakers and markets on edge for months.

European shares climbed to their highest in nearly 14 months on Wednesday on the back of the news.

The FTSEurofirst 300 index of top European shares was up 0.5 per cent at 1,112.93 points after rising as far as 1,114.33, its highest since July 2011. Cyclical sectors gained, with banks advancing 1.6 per cent, insurers gaining 1.5 per cent and autos rising 1.1 per cent. Germany’s DAX was up 0.9 percent, Spain’s IBEX rose 1.3 per cent and Italy’s FTSE MIB gained 0.9 per cent.

Stipulations

“The Second Senate of the Federal Constitutional Court has rejected the injunctions with the stipulation that a ratification of the ESM Treaty is only admissible if [certain conditions] can be guaranteed under international law,” Chief Justice Andreas Vosskuhle said.

Firstly, the court specified that any financial burdens for Germany arising from the ESM were strictly limited to its share of the fund’s capital or $244bn.

If the burdens were to be increased beyond that amount, then it could only be done with the express approval of the German parliament, and both the upper and lower houses must be kept fully informed, the court said.

The professional secrecy to which the fund’s employees were bound “must not stand in conflict with the Bundestag and Bundesrat being comprehensively briefed,” the statement said, referring to the lower and upper chambers.

The court also ruled that Germany must ensure a de-facto opt-out clause if it felt its interests were not being considered.

“The Federal Republic of Germany must make it clear that it does not want to be bound to the ESM Treaty as a whole if any reservations it might have should prove ineffectual,” Vosskuhle said.

There were about 37,000 plaintiffs in the case, including eurosceptics from within Merkel’s centre-right coalition and Left Party hardliners who are opposed to European integration.

The ESM was meant to come into effect in July as a $901.2bn firewall to aid in the fight against the three-year-old debt crisis.

The fund requires the approval of countries representing 90 per cent of its capital base. Germany’s share is more than one quarter of the total, and it is the only country still to ratify the agreement.