The euro zone is on track to expand its bailout fund for indebted countries, and the increase looks set to win approval in Germany's parliament Thursday following its ratification Wednesday by Finnish lawmakers.
But the debate among Europe's crisis managers has already moved on to two thornier issues: a more radical increase in the scope of bailouts, and possible debt restructuring for Greece.
Greece's failure to close its budget shortfall is prompting some European governments, led by Germany, to push for a re-examination of the international bailout program for Athens, according to officials involved in the discussions. In return, Germany is under pressure to agree to "leverage" the euro-zone bailout fund by using its resources in ways that multiply its impact, these officials say.
Discussions about both issues are expected to gather pace in October, once all euro-zone nations have ratified the previous set of changes to the bailout fund. Those changes, agreed by European leaders in March and July but not yet implemented, involve raising the bailout fund's lending capacity to €440 billion ($598 billion) from about €250 billion and letting it use the money more flexibly. Whereas previously the fund, called the European Financial Stability Facility, could only finance bailouts of stricken euro-area countries, the changes allow it to buy government bonds, inject capital into banks, and lend to a country before it hits a full-blown crisis.
All 17 euro-zone national parliaments must approve the changes. Finland's Parliament had been seen as one of the tougher hurdles amid rising political resistance to euro-zone bailouts in the frugal Nordic nation. On Wednesday, however, 103 Finnish lawmakers voted to approve the EFSF expansion, while only 66 voted against.
Germany's parliament is expected to approve the same measures Thursday, thanks to support from opposition parties as well as most lawmakers in the governing coalition. But Chancellor Angela Merkel has been fighting for weeks to quell a rebellion by some of her backbenchers against the EFSF expansion. Such a visible split could potentially embarrass her by revealing the growing divisions among Germany's ruling conservatives over her handling of the euro crisis.
A larger-than-expected backbench revolt could damage Ms. Merkel's political standing at a time when Europe and the world are calling for more-decisive German leadership to end the debt crisis.
European Commission President José Manuel Barroso on Wednesday urged euro-zone governments to speed up their anticrisis efforts, warning in his annual address on the state of the European Union that the bloc risks falling apart if it doesn't quickly come together.
Speaking to the European Parliament in Strasbourg, Mr. Barroso made a case for aggressive action where the EU's 27 member states—and particularly the 17 euro-zone members—so far have been treading cautiously. He decried arrangements that require unanimity for decisions big and small. "Markets are much faster than our governments and our parliaments. We have to respect the rhythm of democracies, but I think in extraordinary times we must ask for an extraordinary effort," he said.
He expressed support for further enhancements of the bailout fund, backed the eventual joint issuance of so-called euro bonds to raise debt. He called for Europe's stronger countries to employ fiscal stimulus, a day after Chancellor Angela Merkel said Germany would do no such thing.
German leaders have been reluctant to talk about their next steps in tackling the crisis until Thursday's vote is out of the way. But German officials are already considering new ways to address Greece's worsening finances and to protect the rest of the euro zone from a potential Greek default, people familiar with the matter say. "After the vote in parliament we'll talk about further ideas, such as debt restructuring and using the bailout fund as efficiently as possible," says a Berlin official.
Euro-zone leaders agreed on a new €109 billion bailout package for Greece only in July, winning pledges from banks to grant Athens some marginal debt relief. However, many economists say the deal still leaves Greece with more debt than it can repay.
Since July, Greece has said it is likely to fall behind its deficit targets for this year. That means a bigger fiscal gap to plug. If Greece turns out to need substantially more money than previously estimated, political pressure around Europe will grow to impose steeper losses on Greece's private-sector bondholders, instead of dipping further into the public purse.
Some German officials increasingly favor a full-blown Greek debt default, followed by a restructuring of Greek bonds that could reduce what the country owes creditors by up to 50%, according to people familiar with the matter. However, this position hasn't become the policy of Germany's government as a whole, these people say.
It also faces stiff resistance from the European Central Bank and France, which fear a Greek default could unleash additional turmoil in euro-zone debt and banking markets, as well as from banks which want the July agreement on Greece to be upheld.
In recent days, Ms. Merkel's government has sought to persuade German lawmakers to back a bigger EFSF by arguing that Europe needs stronger weapons against financial contagion precisely in case Greece defaults.
Germany is under pressure from the U.S., France and some other countries to go further than just expanding the EFSF to €440 billion. Various proposals under discussion would multiply the EFSF's firepower by letting it borrow funds from the European Central Bank or private investors in order to buy euro-zone government bonds, or to offer the ECB or private investors some degree of insurance if they buy such bonds.
While German officials say they are open in principle to using the EFSF's limited war chest "as efficiently as possible," they say these ideas are unlikely to work well unless the ECB cooperates. So far, the ECB has rejected calls to team up with the bailout fund.
Political resistance to such a "leveraging" of the EFSF is high in Germany's parliament, which would have to approve such a move. Ms. Merkel's government has tried to reassure its lawmakers this week that it has no plans to make German taxpayers shoulder even bigger risks.
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