Saving the Common Currency: German Obstructionism Heightens Euro Fears

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Part 2: The European Financial Stability Facility

German Chancellor Angela Merkel is under fire in Europe these days for her opposition to plans aimed at propping up the euro. Zoom
REUTERS

German Chancellor Angela Merkel is under fire in Europe these days for her opposition to plans aimed at propping up the euro.

When the EFSF was launched in May, it was hailed as a robust European response to widespread speculation on skyrocketing debt in several euro-zone countries, most prominently, Greece, Ireland, Portugal and Spain. The establishment of the fund came just days after the EU had agreed on a €110 billion bailout for ailing Greece. The EU, it seemed at the time, had found a tough response to a growing threat.

The early optimism, however, proved to be misplaced. The EFSF, after all, is only a temporary mechanism, and is set to expire in 2013. Without a plan in place to replace the EFSF, the euro zone could simply return to a state of affairs similar to that which existed last year -- high sovereign debt in some countries, wobbly budgets and no safety net.

Indeed, it is the ongoing debate about what might succeed the EFSF which has unsettled markets this winter and made the European Union look hopelessly divided and unable to meet the sovereign debt challenge. Some have even accused German Chancellor Angela Merkel of having driven Ireland into financial dire straits by openly demanding a mechanism allowing for national bankruptcies within the euro zone which would pass some potential losses on to private investors. Interest rates on Irish bonds spiked as a result, and on Wednesday, the Irish parliament agreed on taking out a €67.5 billion loan from the EFSF.

Many countries would like to see the EU simply make the EFSF mechanism permanent. Others, like Spain, would like to see it enlarged. Some want both.

Germany, however, is strictly against such a plan. As the European Union's largest economy, Germany would be the primary financier of any such permanent bailout mechanism. Following the populist attacks in Germany against the Greek bailout in the spring, Merkel is wary of any plan that involves Berlin pledging yet more money to prop up indebted euro-zone countries. Indeed, one of her closest allies -- Horst Seehofer, head of the Christian Social Union, the Bavarian sister party to Merkel's Christian Democrats -- has been one of the most vocal opponents of such proposals.

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