Europe’s highest court has dismissed a challenge by Independent TD Thomas Pringle to the European Stability Mechanism, the permanent bailout fund from which Dublin hopes to draw aid for the surviving Irish banks.

Approving the formation of the ESM, the European Court of Justice ruled today that there was nothing in EU law to prevent the euro zone countries establishing such a fund.

The ESM does not breach the “no-bailout clause” in European law, the court said, and member states were entitled to introduce the fund before a looming change to the EU treaties which says that euro zone countries may set up a stability mechanism.

“The challenged amendment creates no legal basis for the EU to be able to undertake any action which was not previously possible,” the court said.

“The amendment … merely confirms the existence of a power possessed by the member states,” it added. “Since that decision does not confer any new power on the member states, the right of a member state to conclude and ratify the ESM Treaty is not subject to the entry into force of the change.”

The case followed on from Mr Pringle’s Supreme Court appeal to the High Court’s dismissal of his challenge in April to Ireland’s participation in the €500 billion ESM.

Mr Pringle’s challenge was heard last month in Luxembourg by all 27 judges of the European court under a fast-track procedure.

The TD, who represents Donegal South West, argued that the treaty change was not properly enacted and took issue with the fact that the ESM is intergovernmental body operating outside the framework of European law.

The Government, backed in its defence by 10 other member states and the EU institutions, argued there was nothing improper in the treaty change to allow the creation of a rescue fund for any distressed country.

The court held that the treaty change related to the internal policies and actions of the EU, and therefore met the conditions to use a special simplified amendment procure.

In doing so, it said that the change did not encroach on the EU’s exclusive rights in relation to monetary policy for single currency countries. It also said the change did affect the EU’s competence in relation the coordination of economic policies of member states.

“The instruments envisaged in order to attain the objective pursued by the ESM, to provide financial assistance to a member state, clearly do not fall within monetary policy,” the court said.

“The ESM serves instead to complement the new regulatory framework for strengthened economic governance of the EU.

“That framework establishes closer coordination and surveillance of the economic and budgetary policies conducted by the Member States and is intended to consolidate macroeconomic stability and the sustainability of public finances.”

The court ruled that the ESM did not circumvent the ban on the European Central Bank and national central banks from granting overdraft facilities or any other type of credit facility to member states and or purchasing directly from them their debt.

“That prohibition is addressed specifically to the ECB and the central banks of the member states,” the court said.

“The grant of financial assistance by one member state or a group of member states to another member state, directly or through the ESM, is therefore not subject to that prohibition.

“The ‘no bail-out’ clause, which provides that neither the EU nor a member state are to be liable for the commitments of another member state or assume those commitments, is not intended to prohibit either the EU or the member states from granting any form of financial assistance to another member state.

“The aim of that provision is to ensure that the member states follow a sound budgetary policy by ensuring that they remain subject to the logic of the market when they enter into debt.

“Accordingly, it does not prohibit the granting of financial assistance by one or more member states to a Member State which remains liable for its commitments to its creditors provided that the conditions attached to such assistance are such as to prompt that Member State to implement a sound budgetary policy.

“The ESM and the member states who participate in it are not liable for the commitments of a member state which receives stability support and do not assume liability within the meaning of the ‘no bail-out’ clause.”