The euro and stocks both received a much-needed lift yesterday after a German court paved the way for the creation of a €500 billion (Dh2.36 trillion) fund to fight the euro-zone crisis.
Also yesterday, the EU announced plans for oversight of banks in the euro-area that would see cooperation between the European Central Bank (ECB) and local regulators. If enacted, the ECB would become the top supervisor of banks in all 17 countries using the euro.
The German constitutional court threw out a challenge to prevent the country's politicians from signing a treaty to set up the European stability mechanism (ESM). The fund is needed to help build a firewall around Spanish and Italian debts.
Investors showed their relief at the decision. The EuroFirst 300 index was up 0.14 per cent at 1,108.75 in afternoon trading.
The euro gained to a four-month high against the US dollar to above US$1.29.
"It is a step in the right direction," Ralf Wiegert, a principal economist within the global economics team at IHS Global Insight, said of the ruling.
"But you need more fiscal reforms in Italy and Spain, more austerity and, at least in Spain, the situation will at least get worse before it gets better."
In excess of 37,000 German citizens from the More Democracy movement had signed a petition against the ESM. They said the ESM, together with a new fiscal compact aimed at controlling budgets in member states, would be undemocratic.
While many market watchers had expected the judges to reject the appeal, many feared the imposition of strict conditions on the ruling.
In the event, the eight justices of the court decided there must be no unlimited liability for German funds. The €190bn ceiling in government guarantees could be increased only if Germanpoliticians gave their consent.
The decision suggests a further signal of progress in fighting the euro-zone debt crisis after last week's announcement by the European Central Bank it would engage in the unlimited purchase of bonds of struggling euro-zone countries.
Still, some analysts urged caution.
"It could be months before this support actually materialises and, even then, bond purchases will do no more than buy time," wrote Jennifer McKeown, a senior European economist at Capital Economics, in a research note.
The ESM is designed to work as a long-term rescue fund, succeeding the temporary €440bn European financial stability facility from mid-next year.
The EFSF helped to provide bail outs for Greece, Ireland and Portugal.
But the spotlight has fallen on Spain and Italy in recent weeks as their borrowing costs have soared close to levels that risk cutting them off from bond markets.
Attention will turn to the results of elections in the Netherlands in trading today, with markets yesterday pricing in a win for mainstream pro-European parties.
But with central banks poised to take greater stimulus measures to bolster flagging economic growth, risk appetite was set to increase among investors, said Mark McFarland, the chief investment strategist at Emirates NBD Private Banking.
"At last, markets are getting what they wanted," he said. "Bad employment data from the US to force the hand of the US Federal Reserve, a clear statement of intent from the [European Central Bank] that keeps everyone happy, and signs that the slow moving but eminently powerful Chinese Communist Party is upping its stimulus game."
A "no" vote on the ESM would have put an abrupt stop to market euphoria, Emirates NBD had advised clients prior to the vote.
"The markets have been pricing in the idea that the Fed will move. What the Germans have done is probably prolong the rally if the Fed takes action at its September meeting, which concludes on Thursday evening," Mr McFarland added.