Power of the purse

German Chancellor Angela Merkel on Wednesday secured a broad parliamentary majority on the expansion of the eurozone's bailout fund, shortly after describing the escalating eurozone debt crisis as Europe's most difficult hour since World War II.

"What is good for Europe is also good for Germany," Merkel said before the vote in the German parliament, the Bundestag. "If the euro fails, then Europe fails and that cannot happen."

In an address to parliament, Merkel called on the chamber to support changes to the EU's treaties that would allow Brussels to intervene in the budgets of states who constantly break agreed upon fiscal rules.

After her speech, lawmakers voted 503-89 to approve two methods of leveraging the European Financial Stability Facility (EFSF), a 440-billion-euro ($557 billion) bailout fund for the 17 nations that use the common euro currency.

Risks are worth it

Although leveraging the European bailout fund would carry additional risks, the chancellor said there was no other alternative to bring Europe back from the financial brink.

"It would not be justifiable to not take on the risk," said Merkel.

Despite growing criticism from within the ranks of Merkel's center-right coalition government, the passage of the resolution came with the support of the opposition Social Democrats and Greens. The Left party voted against it.

But the "yes" votes from the opposition did not come without criticism of the government's handling of the crisis in the past year. Frank-Walter Steinmeier, parliamentary leader of the Social Democrats, said issues like bank recapitalization and writing down Greek debt had been brought forward by his party some time ago.

"I would like to have heard many of these statements a year ago," Steinmeier said.

After the vote, Merkel was scheduled to fly to Brussels for the final installment of a three-day marathon summit on Europe's escalating debt crisis. The heads of Europe's states and governments are to continue hashing out the details of a debt write-down for Greece, the recapitalization of banks and the leveraging of the bailout fund.

Leveraging the expansion

During the last European summit in July, the continent's leaders expanded the temporary EFSF to its current size of 440 billion euros. The controversial expansion, however, has proven inadequate due to the dismal financial state of Greece and the instable fiscal situations in Italy and Spain, the eurozone's third and fourth-largest economies respectively.

For Athens to get back on a fiscally stable footing, European leaders are likely to call on private banks to write off up to 60 percent of their holdings in Greek government bonds, which could trigger a banking crisis. Tremors within Europe's banking sector coupled with instability in Italy and Spain could quickly exhaust the EFSF's funds.

Unwilling to expand the EFSF with more taxpayers' money, Merkel's government has suggested partially insuring the purchase of risky government bonds - such as those of Greece - by private investors.

Some members of Merkel's own coalition, however, are skeptical of the move and have expressed concerns that leveraging the fund would - in the end - expose Germany to further risk and jeopardize its credit rating.

Frank Schäffler, a representative with Merkel's coalition partners the Free Democrats, expressed concern that the proposed solutions will only exacerbate the fundamental problems driving the debt crisis.

"What the heads of state and government are now discussing is what caused the global financial crisis in the first place," Schäffler said.

Authors: Spencer Kimball, Andrew Bowen (dpa, Reuters)
Editor: Martin Kuebler