German Parliament Votes to Expand Euro Rescue Fund

After Austria and Finland, Germany ratified the expansion of Europe’s temporary bailout mechanism.

The Reichstag building in Berlin, Germany, July 24, 2010
The Reichstag building in Berlin, Germany, July 24, 2010 (Lenny Pichette)

A majority of German lawmakers voted on Thursday to expand the capacity and power of Europe’s temporary bailout mechanism, the European Financial Stability Facility (EFSF), after Austria’s and Finland’s legislatures approved the expansion earlier this week.

European leaders agreed to reform the EFSF in July to enable it to react with short-term lines of credit whenever a financial crisis threatens to occur in the euro area. Germany and the Netherlands had blocked such changes before, fearing permanent bailouts of profligate member states.

Thursday’s vote may be heralded as a victory for German chancellor Angela Merkel who managed to quell dissent in her coalition and her own conservative party about a second, €109 billion bailout package for Greece.

The southwestern European country has teetered on the brink of bankruptcy for one and a half year with no end to its debt crisis currently in sight. Tax hikes and privatizations that were promised by Athens in exchange for international support have not sufficed to convince Euroskeptics in the north to continue to bail out the Greeks. The expanded EFSF however, coupled with an increasingly activist European Central Bank that is willing to purchase sovereign bonds from heavily indebted euro nations, should allow Greece to stave off the specter of default.

If all eurozone parliaments vote in favor of strengthening the EFSF, the fund will be able to finance up to €440 billion in credit. That should be enough to save Greece as well as Ireland and Portugal which had to tap into the facility earlier this year after they weren’t able to borrow at an affordable rate on financial markets anymore. If other troubled euro economies like Italy and Spain were to see their borrowing costs mount as well, the facility would not be big enough to finance their rescue.

The ECB has spent more than €40 buying Italian and Spanish debt but its bond purchase operation is controversial in Germany. Other northern eurozone member states, including Finland and the Netherlands, also resist further expansion of the EFSF despite market pressure to bolster Europe’s rescue potential.

The Netherlands and Slovakia, both wary of bailing out profligate euro state in the periphery, have yet to approve the EFSF expansion. The Slovaks, who only joined the eurozone in 2009, have been particularly recalcitrant. They voted against the first bailout in August of last year and their parliament is turned against the rescue operation although the country’s ruling coalition signaled that a compromise may be in reach this week.