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Getting over excited

30 September 2011

6:07 PM

30 September 2011

6:07 PM

As Peter Oborne observed on Newsnight recently, there is a tendency in the Eurozone to think its problems
are political, rather than an economic crisis that cannot be wished away. For example, the Bundestag’s much vaunted approval of an expanded EFSF has done little to alleviate Europe’s
weakness. Here’s why:

1) We all knew the vote would pass: the opposition support made sure of that. The key point was that Angela Merkel got an absolute majority. It was a close call, but it always seemed likely that
she would gain enough support from the flailing junior coalition party, the FDP, which, given its collapsing poll results, was unlikely to threaten the stability of the coalition for fear of
further falls.

2) Remember what was actually approved. A whole host of analysts and observers have not mentioned that the EFSF is now nearly where it was supposed to be when it was agreed in May 2010. If all the
Eurozone’s national parliaments approve the changes, then the EFSF will have a lending capacity of €440bn. It would also be able to purchase government bonds, something that has been widely
discussed since the fund was introduced. It could also provide precautionary loans that may allow for a more rapid response, which is undoubtedly a good thing in a fast moving crisis. But,
ultimately, it is still just the limited backstop to sovereign funding problems in the Eurozone, falling far short of being able to tackle the juggernaut that is the combined debt of Italy and

3) The European debate has already moved well beyond this vote. Discussions now focus on how to increase the EFSF still further, or whether to revise the second Greek bailout package, or to move to
a full debt restructuring. A separate but related debate involves balancing the EU’s desire to have the ECB buy hundreds of billions of Italian and Spanish government bonds (making it the effective
lender of last resort for the Eurozone) and the evaporating German support for the euro (the Germans still take central bank independence seriously). In addition to that, talk of full fiscal
integration and the collapse of the Euro are mainstream debates. So for all the political capital that Merkel put into seeing this vote through, she was effectively fighting yesterday’s battle.

4) Markets are already setting their eyes on something bigger than the EFSF. It may not be long before Merkel has to go cap in hand to her Parliament again. She would have to explain why MPs and
voters must either provide hundreds of billions more in loan guarantees or accept that the ECB once heralded as the Bundesbank’s heir must print money. This will test Germany’s commitment to the
Eurozone, transfer union and the rest to an unprecedented degree.

Raoul Ruparel is head of economic research at Open Europe

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