Europe Split on Expanding Bailout Fund

Germany resists plans to expand the European Union’s bailout fund.

The Eiffel Tower in Paris, France, October 8, 2010
The Eiffel Tower in Paris, France, October 8, 2010 (Millan P. Rible)

Both the European Commission and France’s finance minister suggested that the European stability fund that was set up last May to protect the eurozone from financial crisis should be expanded. “We need to ensure the effective capacity of this mechanism and we need to widen the scope of its activities,” according to Commission president José Barroso. Christine Lagarde added that it was “one option” being considered by European governments.

German chancellor Angela Merkel said Saturday that any attempt to stabilize the euro should be part of a broader effort however, dampening hopes for a quick resolution. “You cannot simply raise another particular aspect each day,” she told reporters after a meeting of her ruling party this weekend.

The European Financial Stability Facility was set up in the wake of the meltdown in Greece last year. It contains some €440 billion in rescue funds for eurozone governments that are unable to borrow on financial markets at an affordable rate. Ireland had to tap into the facility last November. Portugal is widely expected to have to request a bailout this year.

The real fear is that Spain, still mired in recession, will have to ask for help as well. A crisis in Spain, which has an economy twice the size of Greece, Ireland and Portugal combined, would severely test Europe’s ability to maintain economic stability, if not threaten the future of the single currency as such.

The European Commission manages the fund but does not control it. Individual member states decide whether a country is allowed to make use of the loan guarantees of which it is comprised.

According to President Barroso at a news conference Wednesday, the fund is important “to give reassurances to the markets that the euro area stability is not in question.” Increasing its financial capacity would be a “precautionary measure,” he stressed, “that makes sense when we have a common currency with different budgetary or fiscal positions.”

Neither Barroso nor economy commissioner Olli Rehn said to worry about Spain collapsing. “Spain has adopted many important and appropriate measures over the last months to consolidate public finances,” according to the Finn. “Further crucial reforms on pensions and collective bargaining are under way,” he added so “in terms of fiscal consolidation, Spain is on track.”

Prime Minister José Luis Zapatero’s socialist government has been postponing crucial labor market adjustments and pension reforms however. Only recently did it introduce budget cuts, including a pay cut for public-sector workers and a 30 percent cut in infrastructure investment.

Opponents of expanding the bailout fund fear that it might encourage fiscal irresponsibility in the future. If eurozone governments know that, in the worst case, there is always a bailout available from their neighbors, they would be less inclined to balance their books. The Germans adhere to this line. Their finance minister Wolfgang Schäuble dismissed the notion of expanding the rescue fund as unrealistic on Thursday. Chancellor Merkel said last month that expanding the facility was “not a question.” She pointed out that the Irish had required less than 10 percent of the total stability package.

The German foreign minister and leader of the government’s minority liberal party, Guido Westerwelle, reiterated that there was no reason for an urgent boost in the size of the bailout fund recently. “Only a small part of the fund has been used,” he said, “so there is no need to talk about increasing it.”

As Europe’s largest economy, Germany bears the brunt of the bailout efforts much to the chagrin of prudent German voters. Berlin has pushed for tougher budget rules and austerity and so far, it has managed to get its way.