Merkel’s Rescue Fund Victory Sets Stage for Next Crisis Steps
German lawmakers’ approval of an expansion of the euro-area rescue fund’s firepower handed Chancellor Angela Merkel a victory that paves the way for additional steps to stem the European debt crisis.
The next moves may include leveraging the 440 billion-euro ($599 billion) European Financial Stability Facility, said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London. In addition, there may be “an orderly Greek default later this year, with a haircut on Greek debt, an immediate recapitalization of Greek banks, European guarantees for restructured Greek debt and conditional fiscal support” for Greece, he said.
The lower house of parliament passed the measure with 523 votes in favor and 85 against, granting the EFSF powers to buy bonds in secondary markets, enable bank recapitalizations and offer precautionary credit lines. It raises Germany’s guarantees to 211 billion euros from 123 billion euros.
The bill’s passage by Europe’s biggest economy allows euro- area officials to weigh further measures to bolster Greece and stem investor concern that helped end the biggest three-day rally in 16 months for European stocks.
The euro rose 0.6 percent to $1.3620 at 2:20 p.m. Frankfurt time after rising to $1.3679 earlier in the day in anticipation of the German vote. The Stoxx Europe 600 Index, which is heading for its worst quarter since 2008, fell 0.1 percent at 227.23.
Rescue Fund Timetable
France, which ratified the EFSF expansion this month, hailed the German vote. The European Commission said the expanded rescue fund is set to be in place by mid-October.
Additional measures now in play include further leveraging the EFSF; bringing forward the start of its permanent successor by a year or more; reopening the second Greek rescue agreed in July to increase the financial industry’s contribution; and a safety net for Europe’s banks if default becomes inevitable.
Merkel’s alliance of Christian Democrats and Free Democrats mustered enough votes to pass the changes on the strength of her ruling majority. That meant she didn’t depend on the opposition Social Democrats and Greens, both of which also backed the bill.
“In the end, the unity of the coalition was stronger than the dissent,” Peter Altmaier, parliamentary whip of Merkel’s Christian Democratic Union, told ZDF television. Even so, “we will have to deal with this issue for some time yet.”
Ratification Process
Expanding the fund requires approval in all 17 euro countries. Including Germany, 11 have now authorized the changes, among them France, Italy, Spain and Finland, where parliament voted yesterday. Estonia and Cyprus are also due to vote today and Austria holds its ballot tomorrow, when Germany’s upper house of parliament will debate the fund.
Faced with German voter dismay at bailouts, coalition members, wary of granting more aid, threatened to rebel against the government line. The risk of defeat receded as international concern grew that default by Greece would harm the euro region’s core countries and tip the global economy back into recession.
“I’m not convinced that this bailout package is going to be remotely enough for the euro zone itself,” Wilbur Ross, the billionaire chairman of private-equity firm WL Ross & Co., said today in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “I think it should start with a ‘T,’ not a ‘B,’” he said, referring to trillions instead of billions.
Merkel, who heads the biggest country contributing to bailouts for Greece, Ireland and Portugal, spent weeks cajoling dissenters in her coalition to back the July 21 accord by euro- area leaders to expand the fund. Resistance was most vocal from members of the Free Democratic Party, Merkel’s junior coalition ally that has flirted with an anti-bailout stance.
‘Root Problem’
Provisions inserted into the bill to satisfy Germany’s constitutional court and potential rebels will allow lawmakers to vote on all new aid requests from the 440 billion-euro fund.
Greece’s lack of competitiveness means “insolvency on its own won’t solve the root problem,” Frank Schaeffler, an FDP lawmaker, said in an interview yesterday. He called for Greece to leave the euro region because rescue packages “won’t work.”
“I don’t believe the domino effect we hear about will happen,” he said. “Investors will learn the bitter lesson that their losses can’t be socialized by the taxpayer.”
Schaeffler was one of three FDP lawmakers to oppose the bill. Thirteen coalition lawmakers in all voted against it and two abstained, while 315 backed Merkel. That was four more than the 311 votes in the 620-member chamber that she needed to win a majority from her own legislators.
Nearly two years into the debt crisis centered on Greece, the U.S. is urging European governments to go further and show more urgency. Europeans haven’t responded “as effectively as they needed to,” President Barack Obama said during a round-table discussion at the White House yesterday.
Europeans “are aware of our responsibility,” German Finance Minister Wolfgang Schaeuble said on Deutschlandfunk radio today. “We have to take as many precautions as we can. We must ensure that Europe doesn’t become the starting point of a new, big financial and economic crisis in the world.”