Germany's Constitutional Court has said it will support the eurozone bailout fund, the European Stability Mechanism, boosting confidence in the eurozone's future.
The court was asked to rule on whether the mechanism - which will loan money to governments in financial difficulty and replace the existing European Financial Stability Facility (EFSF) and the European Financial Stabilisation - was constitutionally legal.
Had the court rejected the EU's 500bn euro (£400bn) bailout fund, it was feared the message would have disrupted ongoing attempts to solve the eurozone crisis and could upset the markets still further.
The court has said there should be a cap on how exposed Germany will be to the fund, limiting its share to 190bn euros (£152bn); any increases would be subject to Germany's law makers.
This will go some way to assuage dissenters who complained the ESM would see Germany disproportionately propping up the member states' rescue fund.
The first meeting of the ESM board of governors, which is formed of delegates from each member country (and must be a member of the country’s government with responsibility for finance) will take place on 8 October in Luxembourg.
Speaking to the European Parliament before the announcement, Jose Manuel Barroso, president of the European Commission, appealed to all of the EU countries to realise everyone was in the financial crisis together, and must work with each other to get out of it.
Initial reactions to the news were mixed - on the markets the cost of German borrowing soared, as noted by Sky News' Ed Conway.
Here's how the German government's cost of borrowing shot up in the wake of the constitutional court decision twitpic.com/atqopd— Ed Conway (@EdConwaySky) September 12, 2012
And here's the graphic (click to enlarge)
However, the value of the euro rallied, with a euro now being worth more than US$1.29, and Spanish and Italian borrowing costs fell; Spanish 10-year bond yields fell to 5.5%, while Italian bond yields sneaked back below 5% to 4.99%.
Ismail Ertürk, senior lecturer in banking at Manchester Business School, told the Huffington Post UK he was unsurprised by the announcement since Germany's export competitiveness relied on the euro surviving.
"In the early stages of the eurozone crisis German politicians disguised this fact or did not realise it and were against ECB activism to save the euro and the eurozone banks," he said.
"But since the ECB governor Draghi's Long Term Refinancing Operations in December 2011 and February 2012 and now the recent Outright Monetary Transmission policy, Merkel at least implicitly admits the euro and Germany's fates are the same."
However, one European think tank has already warned that there may be a significant delay in Germany officially signing the ESM.
Bruegal's deputy director Guntram Wolffe said that the second condition, which demands that the two chambers of the German parliament (Bundestag und Bundesrat) need to be fully informed of any change to the cap on Germany's financial input into the bailout fund, might need to be redrafted.
"Article 34 grants professional secrecy to the ESM governors, i.e. the ministers, and directors. This would essentially remove them from their obligation to fully inform their national parliament and may even in some circumstances restrict their scope to inform the parliament," he explained.
"The Karlsruhe judges now demand the that these two objections are removed in... a way that is binding in international law. My first reaction would be this probably cannot be done by just agreeing in the German implementation law that the conditions are met. It may require changes in the ESM treaty or a new side treaty to the ESM.
"My suspicion is that it will significnatly delay the implementation of the ESM."
What it means for the UK:
Creating a bailout fund to lend struggling eurozone governments money is crucial to stabilising the eurozone crisis, and while the effects won't be seen immediately, it will go someway to restoring confidence in Europe.
Even though the UK is not in the euro area, all treaty changes must be approved by every member state, which means the UK government will be called upon to ratify the decision.
It's also worth noting that prime minister David Cameron managed to obtain an amendment to the original treaty in March 2011 to ensure that the UK will not be liable through the EU budget for any future eurozone bail-outs under the EU budget once the ESM comes into force.
And with more than 50% of our export trade going to the wider European Union, we are affected significantly by decisions taken on the ESM.