Germany ups EU bailout fund – but is it enough?

WHAT'S HAPPENED?GERMAN MPs have today approved a motion backed by Chancellor Angela Merkel to expand the eurozone bailout fund – a crucial step in assuring the financial markets that Europe is taking seriously the sovereign debt crisis affecting countries such as Greece, Spain and Italy.

WHAT DOES IT MEAN?The European Financial Stability Facility buys the bonds of struggling eurozone governments so that they can borrow more cheaply than they could otherwise afford, thus staving off the threat of default.

This morning, German MPs agreed to increase their country’s contribution to the EFSF to €211bn. The aim is for all eurozone countries to ratify the agreement over the coming weeks and expand the fund to a total of €660bn.

This will enable it to lend up to €440bn to troubled countries. Clearly, Germany is by far the largest contributor.

Merkel was always going to win this vote, because she had the support of the opposition SPD and Green parties. Her main fear was the prospect of rebels in her own Christian Democrat party forcing her to rely on the support of the opposition. The size of her victory - 523 to 85 - will be a comfort to financial markets.

"A reliance on [opposition] support would have cast into doubt [Merkel’s] ability to get forthcoming votes on a further bailout for Greece and a permanent successor to the EFSF through the Bundestag," says BBC News.

The permanent successor referred to is the European Stability Mechanism, which was due to take over from the temporary EFSF in 2013, but which – under pressure from the United States and investors – may now be created as early as this year.

WHAT NEXT?Germany is the eleventh eurozone country to agree to the EFSF expansion – another seven states still need to ratify it. Austria will vote on the expansion tomorrow.

But few people believe the expanded EFSF will be big enough to deal with the crisis in Greece - which faces an almost certain debt default - and the possibility of it spreading to other weak countries such as Italy and Spain.

The United States wants the eurozone to "leverage" the EFSF so that it can provide guarantees of perhaps more than €3 trillion.

Bloomberg suggests that, besides leveraging, next steps could include "bringing forward the start of [the EFSF’s] 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". ·