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Sep 28 2011

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Critical Vote in the EU Debt Crisis

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The Cascade Could Begin Tomorrow

You would hardly know it from the reporting in the US, but an epic vote will take place tomorrow in Berlin, a vote that will have wide-ranging implications for the European sovereign debt crisis and the global economy.

German Chancellor Angela Merkel’s coalition government will vote on a measure to provide additional authorities to the European Financial Stability Facility (EFSF); effectively the European equivalent of TARP.

Created in the spring of 2010 after the Greek financial disaster became apparent, the EFSF is one of the few financial tools in the hands of EU policy-makers to fight financial fires early, when financial institutions or countries are in danger in the Euro-zone.

Like TARP, the EFSF is a mechanism that can provide stability to financial markets and reassurance to investors, as the EU tries to cope with the sovereign debt crisis on its southern rim.

The Bundestag will vote tomorrow on whether to expand the EFSF’s authorities to extend credit lines to banks and buy bonds in the secondary markets.

But there is a problem.

Merkel’s ruling coalition is made up of parties that are skeptical of efforts to bailout spendthrift southern European economies, and deeply opposed to delegating additional national authority to an EU body that could place German taxpayers on the hook for untold billions in bad debt.

This is no small issue.

While the amendments to the EFSF that are under consideration are fairly narrow, EU policy makers continent-wide are increasingly looking to the EFSF as a  precursor for a  truly colossal facility  – upwards of 2-3 trillion euro – that would be able to address an event, such as the potential collapse of Italy, in the continuing sovereign debt crisis.

No matter how economically necessary an expanded EFSF may be for Europe, the support for such an effort by German citizens is anything but assured. Indeed, such a massive facility would have to be guaranteed, to a significant degree, by the Germans, which makes the vote tomorrow a surrogate for something much bigger.

So the vote is not only a pivotal economic lifeline for Europe, it also represents a supreme test of Angela Merkel’s political strength. And right now, with opposition brewing within her own ranks, it is an open question whether Merkel’s majority will be able to pass the legislation.

And that matters.

The Chancellor’s coalition is made up of 332 members in three parties. If more than 20 of her deputies vote against the measure, Merkel will have to depend on the votes of the opposition Social Democrats and Greens to pass the measure.

While the support of the opposition will carry this step on EFSF forward,  a failure of Merkel’s coalition would signal the end of a German governing consensus on the German role in the southern European bailouts. Such a vote would bring divisions in Merkel’s coalition into the light of day, and weaken the Chancellor perhaps beyond repair.

What happens after such a shock is unclear.

The vote in EFSF is not an actual vote of confidence, thus the Chancellor will keep her job, at least in the short run.

But in Germany’s parliamentary system, a government without the confidence of its majority might splinter, forcing Merkel to rule with much diminished power in a minority government.

There could also be pressures for early elections (the next scheduled national elections are in 2013) to sort out German popular opinion, a move that would hopelessly distract the Germans from the realities of the debt crisis as the parties maneuver for political advantage.

Currently, opposition parties are out-polling Merkel’s coalition by more than 10 points.

What is clear is that any governing crisis in Germany will create a political vaccum in the heart of Europe at a most sensitive and critical juncture.

That governing crisis will have a profoundly negative impact on the EU sovereign debt crisis, which will continue to deteriorate without pro-active German engagement.  And any increased instability in the Euro zone, already afflicted with anemic growth that is placing pressure on government budgets and increased austerity plans, will represent a clear and present danger to the global economy, including the US; a potential economic and financial cascade without a circuit breaker.

So tonight, 20 German lawmakers effectively hold the health of the global economy in their hands.

What is left to do?

Pray.

 

 

 

 

 

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