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Merkel’s euro battle victory won’t end the debt war

The German chancellor’s success on the bailout fund is welcome – but bigger and more effective measures are needed

Angela Merkel’s success in persuading the Bundestag to ratify the changes to the €440bn (£382bn) euro bailout fund, the European Financial Stability Facility, is good news – but only because a failure would have been a disaster.

The EFSF is still much too small to be effective – €2tn is the number doing the rounds if it is actually to contain the crisis. A Greek default looks no less likely than it did yesterday (ie, not much short of inevitable). And there is nothing in any of the measures Germany has signed up to which will convince the markets that eurozone countries are all in it together.

At the 21 July emergency summit in Brussels, as the markets pushed Greece close to the brink and threatened to drag Italy and Spain into the danger zone by ratcheting up their borrowing costs, Merkel, Nicolas Sarkozy and other eurozone leaders signed up to what they hoped was the be-all-and-end-all solution to the crisis.

They would beef up the EFSF, allowing it to fund bank rescues in countries rocked by fears of default, and to buy the bonds of troubled countries to prevent interest rates spiralling out of control.

After more than two months of moving at a snail’s pace, the Europeans have promised their G20 partners, including a very worried Tim Geithner from the US, that they will get parliamentary approval for these measures in all 17 euro member states by mid-October.

Finland and several other countries have already done so; others will follow in the coming days. Germany’s upper house, the Bundesrat, will vote on Friday.

But while the democratic process eurozone-style grinds on, the July deal has been comprehensively overtaken by events.

Financial markets have driven up the yields on Italian and Spanish bonds, despite frantic buying by the European Central Bank (ECB), the only institution with any firepower until the EFSF is rebooted.

That suggests investors have little confidence that anything agreed so far would be enough to contain the shockwaves that would follow a Greek default.

Meanwhile, Greece has drifted ever further away from meeting the conditions laid down by the “troika” of the ECB, the International Monetary Fund and the European commission, partly because its economy is contracting even more rapidly than feared.

It now looks as though a deal will be done in the next few days to release the latest €8bn tranche of last year’s bailout (which, remember, was meant to put Greece on a sustainable track), but behind the scenes there is a growing acceptance that the time has almost come to pull the plug.

Even if the July deal sails through every other parliament, eurozone leaders need to come up with something much larger, more effective, and more like a promise to stand behind each other, come what may. Politically, that may be a much harder sell, but the fractious mood at the IMF meetings in Washington last week showed that as the market turbulence takes its toll, the rest of the world is running out of patience. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds