German parliament backs bailout fund increase

GERMANY kept alive hopes that the euro can survive the sprawling debt crisis when lawmakers voted overwhelmingly in favour of expanding the powers of the eurozone’s bailout fund.

Yesterday’s vote strengthened Angela Merkel’s centre-right coalition, which had struggled to win support from a bloc of rebellious members, and could bolster her ability to negotiate new European crisis measures.

While many investors and experts believe new steps will be required in Europe, such as letting Greece write off more of its debt pile, Germany’s approval of the fund’s new powers and scope was necessary to avoid a new bout of massive market turmoil.

“The support of the Bundestag is an important step for stabilising the eurozone,” said Michael Kemmer, head of Germany’s Bank Federation.

“With that, they have set a course that leads out of the debt crisis,” he added.

The €440 billion fund will be able to buy government bonds and lend money to banks and governments before they are in a full-blown crisis, making Europe’s response to market jitters more rapid and pre-emptive.

Germany, which pays the lion’s share of European bailouts, became the 13th member of the eurozone to support the expansion of the rescue fund, the so-called European Financial Stability Facility, or EFSF. Cyprus also passed the proposed expansion yesterday.

Austria’s parliament is widely expected to pass the measure today, the same day Germany’s upper house of parliament is set to finalise its vote, while the Netherlands is expected to approve it next week.

The biggest remaining hurdle is the final country to vote — Slovakia — where the government will not have enough support to pass it if the leader of the junior coalition Freedom and Solidarity party follows through with threats to vote against the fund’s expansion. Its parliament is to vote later in October.

In Berlin, 523 lawmakers in the Bundestag voted in favour of expanding German participation to guarantee loans of up to €211bn, compared with €123bn so far; 85 voted against it and three abstained.

“It was a strong statement of Angela Merkel’s position. She has the backing and the support of the coalition and she is able to negotiate on the European level,” Peter Altmeier, the parliamentary whip for Merkel’s Christian Democrats, said.

Markets appeared calmer following weeks of turbulence triggered by uncertainty over Germany’s position on the fund. The euro also traded slightly higher.

Forging consensus over new measures — particularly something as delicate as imposing more severe losses on Greece’s creditors — will likely be very difficult, however.

Indeed, the parliamentary debate in Berlin was a feisty three-hour long affair, reflecting how high tensions in Merkel’s coalition were running over the provision of more backing to the eurozone’s weakest members.

Frank Schaeffler, a dissenter from the junior coalition partner, argued bailout measures have worsened Greece’s economic situation: “Despite all arguments, the first bailout did not make the situation for Greece better, but worse.

“Expanding the fund will make the situation even worse.”

Any future changes to the current fund will also require parliamentary approval and maintaining that determination will be crucial to making swift, effective decisions to combat the crisis.

In addition, the Bundestag will face another major vote early next year on the fund’s permanent replacement, the European Stability Mechanism, which is due to take effect in 2013. Mr Schaeffler has already vowed to rally his party to reject the ESM.

FDP Party leaders insist they are not worried by Schaeffler’s plans.