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Portfolio > Economy & Markets

Test Vote Threatens Germany’s Merkel, Euro Zone Rescue Fund

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A test vote in Germany’s Parliament on Wednesday brought bad news for Chancellor Angela Merkel, and perhaps for the whole euro zone.

Members of Merkel’s own party, the Christian Democrats, voted against an enlargement of the European Financial Stability Facility in far larger numbers than expected, spawning worries that Merkel may be unable to push through a sufficient increase in the EFSF to make a difference in the euro zone debt crisis.

Although the Bundestag was expected to pass the beefing up of the EFSF—a measure approved by European leaders in July—rebellious members of Merkel’s own party, tired of public-paid bailouts for peripheral euro zone countries and banks, could force her to rely on the opposition, Reuters reported.

That would be politically damaging for Merkel and could threaten her ability to push through additional rescue measures in the future. Support among German citizens for expensive bailouts funded with taxpayer money is low and shrinking.

To add to the dilemma, debate is still raging over how—and how much—the EFSF might be increased. Increasing the amount of funding outright is opposed by many euro zone countries, as is a proposed plan to leverage the existing fund so that it could be used as collateral to borrow additional money from the European Central Bank (ECB).

However, while numerous proposals abound, there is little agreement, particularly since committing to one or another strategy might lose German support and threaten the plan.

After having succeeded in passing further unpopular austerity measures on Tuesday, Greece continued to insist that it would meet all targets set by the International Monetary Fund and ECB, despite having already missed several goals. Its fate, and possibly that of the euro zone itself, hangs in the balance as leaders wrangle over the rescue package. If Athens does not get the next round of funding, and perhaps even if it does, default lurks in the wings.

Only one thing seems certain: with so little common ground reached, the immediate and dramatic action called for by numerous economists seems impossible.


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