The fate of the euro may not lie in the hands of national governments, or bond markets, or even European Central Bank governor Mario Draghi.
Instead, it might all hang on the words of eight judges in Germany.
Next week, the German Constitutional Court is due to decide on German membership of the European Stability Mechanism (ESM) or as we call it, Europe's big bail-out fund. There is a strong possibility that the court may bar Germany from taking part, or limit its involvement.
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That would be a problem. The ESM is key to the European authorities' plans for resolving the euro crisis. If Germany cannot take part, they would be forced back to the drawing board.
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Markets which seem increasingly convinced that Europe is on the brink of a permanent solution to its problems wouldn't take kindly to that. Some even believe this could lead to the breakup of the euro.
So what might happen? And how will it affect your portfolio?
Germany's constitution might scupper Europe's bail-out fund
When West Germany was created in 1949, it adopted a new constitution. This is called the Basic Law'. This set up the Federal Republic's structure and defined some basic rights. Among other things, judges were given the power to strike down laws that went against the constitution. This law was extended to the rest of Germany in 1990.
A key aspect of the Basic Law' is that the German parliament controls the national budget. This places limits on the amount of power that can be handed over to foreign bodies.
Opponents of the ESM and the accompanying fiscal pact (which limits both the amount of debt a country can take on and the annual deficit) argue that both allow key fiscal decisions to be taken by the European Union, rather than the German parliament.
Under this view, the ESM and fiscal pact oppose the Basic Law'. So they were challenged in the German courts back in June.
Now, like lots of constitutional matters, the issue is by no means clear-cut. Angela Merkel's government disputes this interpretation. They note that other parts of the Basic Law encourage "European unity". The government had wanted a quick ruling on this, to avoid yet more uncertainty hanging over the eurozone. But the Constitutional Court decided instead that it would rule on the matter on 12 September.
So what's the likely outcome?
German support for the fiscal pact is a side issue. While it would be embarrassing if Berlin didn't sign up for it, the pact is designed to go ahead even if one or more nations refuses to take part. And Germany is hardly the main target of the fiscal pact in any case.
However, the ESM is a very different matter. Germany is the largest participant, providing over a quarter of the fund's capital. And because nearly a third of funding comes from the near-bankrupt Spain and Italy, it may end up contributing even more. This gives it veto power over any decisions.
In other words, it's vital that Germany takes part. But there's no guarantee that the court will allow it.
In practical terms, there are three main outcomes. The court could just decide that the ESM and fiscal pact are constitutional, and wave them through without change.
Alternatively, it could declare that they are void. Or, a less extreme third alternative, is that it approves them, but insists on certain restrictions which limit the ESM's powers.
It is impossible to predict which option the eight justices will go for. However, the third looks plausible. No court wants to be seen as interfering in national politics. However, it has also warned in the past that European integration risks breaking the law. Therefore doing nothing could undermine its credibility.
The question is, how big might the restrictions be? Kiron Saker of the Longwave Group thinks that one possible scenario is that the court caps Germany's liability. This would stop Germany from increasing the amount of money that it can put into the ESM. It would also prevent the ESM from increasing its funds by becoming a bank. Both restrictions would limit its power.
Why you should stick with European stocks
That sounds like bad news. And in the first instance, any sign of Germany quashing or restricting the ESM's scope would certainly hit the markets.
Yet, it could be the kick in the backside the ECB needs. Until now, the ECB has been loath to print money, partly because of German opposition. Indeed, the ECB has insisted that it expects countries to go to the ESM first.
But if the ESM's power is limited and markets lose faith in the bail-out fund, then there are only two options left on the table: either the ECB buys bonds, or the weaker countries leave the euro.
Either decision would be good for growth. More bond buying by the ECB would boost the money supply, reduce the risk of deflation and probably send asset prices in the region soaring. But even if the ECB failed to print more money, an exit from the euro would ultimately be good for the struggling nations, as they could take control of their own monetary policy again.
In other words, as financial markets historian Russell Napier noted in our recent interview with him, all roads lead to money printing it's just a question of which currency. We therefore think that you shouldcontinue to put money into the Italian and Spanish stock markets. We explain why in our recent MoneyWeek magazine cover story on the topic. (If you're not already a subscriber to MoneyWeek, subscribe to MoneyWeek magazine.)
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