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Germany approves expanded EU bailout fund

Updated On: Sep 30, 2011

Germany's parliament has voted in favour of supporting a more powerful fund to bail-out troubled eurozone economies. Germany's support of the expanded bailout fund has boosted hopes that the 17-nation Euro currency can survive the present debt crisis.

German Chancellor Angela Merkel received strong support for the move, despite criticism of the bailout plan from some of her ruling coalition. Many Germans are against committing more money to prop up struggling eurozone members such as Greece.

But the outcome of the vote was not in question, as the main opposition parties, the SPD and the Greens, indicated they would support the measure. Thursday's vote still needs to be approved by Germany's upper house of parliament, but it is expected to pass without difficulty.

With Germany's support, 13 countries in the 17-member eurozone have now backed the expansion of the rescue fund, the European Financial Stability Facility (EFSF). Finland approved the measure in its parliament on Wednesday, while Cyprus and Estonia also passed the proposed expansion yesterday. Austria is expected to vote in favour of the move on Friday.

The agreement raises the fund's capacity from its current €250 billion (US$338 billion) to €440 billion (US$600 billion). The deal also hands the EFSF new powers, such as the authority to buy bonds of struggling countries and indirectly bail out overexposed banks that run into trouble, allowing Europe to be more proactive in dealing with potential crises.

Report: German parliament approves expanded EU bailout fund [BBC, 29 Sep 2011]

Report: Germany keeps alive hopes for euro's future [Forbes (AP), 29 Sep 2011]

But all countries that use the euro must ratify the commitment, and it is not clear that the move will receive universal support. Germany is Europe's de facto paymaster, providing the lion's share of bailout money, thus the bill's passage in the Bundestag is an important milestone. However, the expanded bailout fund is expected to receive strong opposition in Slovakia when it goes to vote on October 17.

Slovakia is an impoverished former Soviet country, and Slovaks are extremely hostile to the idea of bailing out theoretically richer countries like Greece. Leading Slovak politicians have been highly critical of the new bailout plans, and the governing coalition is divided about supporting the fund.

The present crisis has strained European solidarity, with many viewing the debt-laden eurozone members such as Greece, Portugal and Ireland as reckless and lazy.

Additionally, even if the expanded fund passes in all 17 countries, analysts have warned that the fund may still be too small to defend against speculative attacks on deeply indebted European nations. The new rules for the bailout fund were only agreed on by euro zone leaders last July, but several experts believe they are already outdated. The recent buffeting of markets in Italy and Spain may indicate that a heftier rescue mechanism is needed.

Analysis: With Germany in Fold, Slovakia Is Euro Fund’s Main Hurdle [New York Times, 29 Sep 2011]

Analysis: Germany Votes Yes, But the Euro Crisis Is Far From Over [TIME, 29 Sep 2011]

Yesterday, international auditors resumed talks in Greece to decide whether the government in Athens was doing enough to merit more financial aid. But the meeting was overshadowed by growing social unrest over the austerity measures taken by the Greek government as a condition of the international bailout.

Protestors blocked entrances to a number of ministries in Athens, with public sector workers striking across the country. Many in Greece oppose taking bailout money, as it means new taxes and public spending cuts, arguing that austerity measures are pushing Greece's crippled economy deeper into recession and strangling any chance of growth. But without international assistance, Greece may soon run out of money.

The situation in Europe thus remains uncertain. However, investors have reacted with some optimism, with sentiment boosted by Germany's support for the expanded eurozone rescue fund. European, US and Asian stock markets all rose in apparent response to the news.

Report: Stocks rise on Germany bailout boost [AFP, 29 Sep 2011]

But this is not the first time stocks have staged a comeback on expectations that a solution has been found, only to resume a decline as hopes dissipate. Analysts warn that there will not be any quick and easy fix for the European government debt crisis.

An increase in bailout funds will not wipe out the huge debts that have taken years to accumulate, just as bailing out American banks in 2008 did not wipe out the huge amount of subprime debt that homeowners had borrowed but couldn’t repay. A bailout is a band-aid, not a long-term solution. The problem could take years to resolve.

However, Germany itself is an example of how a country can go quickly from a period of high unemployment and sluggish growth to regain status as an economic powerhouse, through a series of reforms in the early 2000s.

Some experts also believe that Europe may actually be in better shape than the United States. Debt levels are painfully high in European countries like Italy, Ireland and Greece, but overall eurozone debt as a percentage of gross domestic product is 85 percent, less than the 93 percent level in the United States.

Analysis: In European Crisis, Experts See Little Hope for a Quick Fix [New York Times, 29 Sep 2011]

 







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