German lawmakers have approved a measure to expand the European Financial Stability Facility rescue fund. The lower house of parliament passed the measure with 523 votes in favor and 85 against, upping Germany’s guarantees from 123 billion euros to 211 billion euros. The measure will grant the fund the power to buy bonds in secondary markets, enable bank recapitalizations, and offer precautionary credit lines.
Increasing the fund will better allow the EFSF to act in defense against the sovereign debt crisis, and the Bundestag’s vote will allow German policy makers to now focus on Greece’s second bailout. That discussion “may morph into a debate about 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” said Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London.
While many German voters and lawmakers originally opposed upping Germany’s contribution to the fund, growing concern that default by Greece would hurt the euro zone’s core countries and send the global economy back into recession quickly melted many of their objections. But “the German parliament is voting for too little, too late,” contends Fredrik Erixon, head of the European Centre for International Political Economy. “[German Chancellor Angela Merkel] can’t possibly believe this is the final point in a rescue package that will calm global markets and lead us out of the crisis.”
As Germany finally comes around, joining eight other countries that have ratified measures to expand the EFSF, many additional measures are now in play, including further leveraging the rescue fund, bringing forward the start of its permanent successor by a year or more, reopening the second Greek rescue package agreed upon in July in order to increase the financial industry’s contribution, and creating a safety net for Europe’s banks should Greek default become inevitable.
All 17 euro-zone nations must approve measures to expand the fund — nine have authorized the changes so far, including Germany, France, Italy, Spain, and Finland, where parliament just voted on Wednesday. Estonian lawmakers will vote on the measure today, while Austria will hold a ballot tomorrow, when Germany’s upper house will debate the fund.
Responding to President Barack Obama’s call for European leaders to respond more quickly and effectively, German Finance Minister Wolfgang Schaeuble said Europeans “are aware of our responsibility,” adding, “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.” If the rescue fund must be further enhanced, said Schaeuble, it will be done in the “most efficient way.”
Schaeuble has also asked all 17 euro nations to come up with “backstop plans” to protect banks if the crisis worsens. Those plans will be outlined at the next euro-area finance ministers’ meeting on October 3, where they are also expected to decide whether to release Greece’s next tranche of aid.