Germany Votes on Euro Rescue Fund to Set Stage for More Anti-Crisis Steps

By Tony Czuczka and Brian Parkin - Sep 29, 2011 2:22 PM GMT+0700

German lawmakers are set to back an expansion of the euro-area rescue fund’s firepower as European officials turn to look at what next steps may be needed to stem the debt crisis.

The plan before the lower house in Berlin today would allow the fund to buy bonds of distressed states and offer emergency loans to governments, raising Germany’s guarantees to 211 billion euros ($287 billion) from 123 billion euros. The main opposition Social Democrats and Greens have said they will vote with Chancellor Angela Merkel’s government, assuring passage.

Lawmakers are debating the measures and will vote from about 11 a.m. Berlin time as government officials weigh further measures to bolster Greece and stem investor concern that helped end the biggest three-day rally in 16 months for European stocks. Options include seeking further writedowns on Greek sovereign bonds, adding yet more firepower to the rescue fund and a “plan B” for banks.

“The German parliament is voting for too little, too late,” Fredrik Erixon, head of the European Centre for International Political Economy in Brussels, said by phone. “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.”

Recession Risk

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.

Additional measures now in play include further leveraging the rescue fund, known as the European Financial Stability Facility; 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.

“Europeans finally get it,” Mohamed El-Erian, chief executive and co-chief investment officer of Pacific Investment Management Co., said in a Bloomberg radio interview on Sept. 27. “They recognize they have deep problems, and they recognize they need to do something about it.” Even so, “let’s not underestimate both the political challenges and the engineering challenges.”

Merkel, head of Europe’s largest economy and the biggest country contributor 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.

Coalition Dissenters

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. Leaders of the Free Democratic Party, Merkel’s junior coalition ally that has flirted with an anti-bailout stance, say the bill will now pass on the strength of the coalition’s majority.

“Anyone who wants the stability of the euro countries has to support the expanded rescue fund,” Economy Minister Philipp Roesler, who chairs the FDP, was quoted as saying in the Bild newspaper on Sept. 26.

Merkel’s coalition has 330 seats in the 620-member lower house. With a simple majority of 311 required to pass the bill, she can afford 19 dissenters before depending on opposition votes to win approval.

Ratification Process

Expanding the fund requires approval in all 17 euro countries. Nine have authorized the changes, including France, Italy, Spain and Finland, where parliament voted yesterday. Estonia also votes today and Austria holds its ballot tomorrow, when Germany’s upper house of parliament will debate the fund.

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 roundtable 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.”

‘Backstop Plans’

If the rescue fund must be enhanced further, it will be done in the “most efficient way,” Schaeuble said on Sept. 27. He said that he had also asked all 17 euro states to come up with “backstop plans” to shield banks if the crisis worsens. The plans are to be outlined at the next euro-area finance ministers’ meeting on Oct. 3, when they are due to decide whether to release the next aid payment for Greece.

Frank Schaeffler, an FDP lawmaker who says he will vote against the bill, called for Greece to leave the euro region because rescue packages “won’t work.”

Greece’s lack of competitiveness also means “insolvency on its own won’t solve the root problem,” he said in an interview yesterday. “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.”

To contact the reporters on this story: Tony Czuczka in Berlin at aczuczka@bloomberg.net; Brian Parkin at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net