September 22, 2023

Expansion of European Bailout Fund Clears Hurdle

The 103-to-66 vote, with 30 legislators absent, still leaves 7 of the 17 members of the euro zone yet to ratify a bailout fund that, despite expanded resources and power, is considered much too small to fend off further market attacks on Greece and other wounded countries.

The laborious approval process, which can be held up by objections from any one of the countries in the euro zone, has highlighted deep flaws in alliance’s decision making. Every major initiative must traverse an obstacle course, and each hurdle can jostle financial markets anew.

On Wednesday, major stock market indexes in Europe fell after three consecutive sessions of gains.

Though Finland can now be checked off the list, the next holdout may prove to be Slovakia, where there was talk a vote on the bailout fund might be delayed until late October, past the unofficial deadline of midmonth. Many Slovakians resent having to help bail out Greece, which, despite its problems, is wealthier.

José Manuel Barroso, president of the European Commission, warned Wednesday that countries in the euro zone must move toward greater unity for the alliance to survive.

“We are today faced with the greatest challenge our union has known in all its history,” Mr. Barroso said in his annual State of the Union address at the European Parliament in Strasbourg. “If we don’t move forward with more integration, we will suffer more fragmentation. This will be a baptism of fire for a whole generation.”

Leaders in Germany and elsewhere played down speculation that they were working on bolder responses to the crisis, like a mechanism that would multiply the borrowing power of the bailout fund, the European Financial Stability Facility. Officials said they were preoccupied with getting parliamentary approval for existing measures.

But the euro zone countries face intense pressure from the United States, China and other countries to more forcefully address the sovereign debt problem before the meeting of the Group of 20 leading economies that begins Nov. 3 in Cannes.

“The euro area has been given an ultimatum to put its crisis once and for all behind its back over the coming six weeks,” Jacques Cailloux, chief European economist at Royal Bank of Scotland, wrote in a note to clients.

In an initial attempt to impose more spending discipline on euro zone members and to prevent future crises, members of the European Parliament voted Wednesday in favor of rules that would impose fines on countries that break budget and deficit rules.

Members of the euro zone are supposed to hold their budget deficits below 3 percent of gross domestic product, and total debt below 60 percent of G.D.P., but few do.

Under the new rules, countries that exceed those limits will be pressed to make a cash deposit — in an account that pays no interest — equal to 0.2 percent of G.D.P. If they still fail to rein in spending, they will forfeit the deposit.

While finance ministers would still need to agree to punish countries, the voting system has been adjusted to make it significantly more difficult to block sanctions.

In addition, national budget plans will come under greater scrutiny, and there will be an alert system to try and detect looming problems like the housing bubbles that helped create the debt crises in Spain and Ireland.

The German Parliament is scheduled to vote Thursday on the bailout fund, in what is seen as a crucial test for Chancellor Angela Merkel.

Austria is scheduled to vote Friday. The remaining countries are Cyprus, Estonia, Malta, the Netherlands and Slovakia.

There were indications that Slovakia’s Parliament might not vote until Oct. 25, beyond the midmonth deadline set by Olli Rehn, the European commissioner for economic and monetary affairs.

That would be about three months after representatives of the 17 countries in the euro zone agreed to give the rescue fund more money and power. The expanded fund will be able to loan up to €440 billion, or about $600 billion, and issue guarantees for €780 billion.

Mr. Cailloux said that the fund needed about €2 trillion to be effective.

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