German Lawmakers Approve Broadened EFSF

BERLIN—As a blockbuster deal to resolve the spreading euro-zone debt crisis eluded European leaders on Wednesday, German Chancellor Angela Merkel and the swooning euro currency got a boost when German lawmakers backed a resolution approving leveraging models for the euro zone's bailout fund.

The euro surged in currency trading immediately following the announcement that Germany's Bundestag, or lower house of parliament, approved the resolution with a majority of 503 lawmakers out of a total of 596. Ms. Merkel's own coalition carried the vote with 311 votes, the absolute minimum needed for the coalition to achieve its own majority and not rely on borrowing votes from the opposition.

The vote represents broad support for Ms. Merkel to continue pressing for a comprehensive bailout package that includes involvement of private-sector investors and tough economic and fiscal reforms in weakened euro-zone member countries. But it also demonstrates how thin support for further bailouts has become within Ms. Merkel's center-right coalition of Christian Democrats, the Christian Social Union of Bavaria and pro-business Free Democrats.

Touching on a theme that she has repeated throughout the crisis, Ms. Merkel said Europe mustn't waste the opportunity it has now to correct mistakes made at the creation of the euro. Germany is pushing for a number of changes to European treaties and the currency union to promote integration of euro-zone fiscal policies and get other euro-zone members to commit to a German-style debt brake that would force national governments to balance their budgets.

"We have to seize this opportunity now or never to correct the architectural flaws made when economic and monetary union was created," Ms. Merkel told parliament. "And if we correct these mistakes now, then we will have grasped the opportunity in this crisis."

To ensure broad support, Ms. Merkel's conservative alliance reached out to the opposition to draft a multiparty resolution. Lawmakers thus gave broad parliamentary backing for a plan to boost the lending capacity of the European Financial Stability Facility, or EFSF, to more than €1 trillion by allowing the fund to insure new bonds for weakened euro-zone member states and to create an investment vehicle to attract private investment in euro-zone bonds.

Lawmakers warned about potential risks and insisted that Ms. Merkel ensure there will be no increase in the €211 billion worth of guarantees that Germany has pledged for the EFSF.

Lawmakers also pressed Ms. Merkel to push banks considered systemically relevant to raise core capital to 9% by a deadline of June 30, 2012 and urged her to insist on an end to the European Central Bank's program of purchasing euro-zone bonds on the open market to prop up weakened euro-zone members as soon as the EFSF is launched. German lawmakers also called for a clear European commitment to the ECB's independence.

"We don't want the ECB to purchase such bonds in the future," said Volker Kauder, head of the parliamentary group of Ms. Merkel's alliance of CDU and CSU conservatives.

In the resolution, which was drafted by all the major parties in the Bundestag, German lawmakers also urged Ms. Merkel to work toward introducing a European-wide financial transaction tax after the meeting of G-20 leaders in Cannes next month.

The German vote came as talks between European Union negotiators and European banks appeared to be stuck. At issue was a voluntary writedown on Greek bonds that would hit private-sector investors harder than agreed at a summit in July, a prospect that is meeting with resistance from banks.

The deal made in July has been overtaken by economic realities, Ms. Merkel said. The situation in Greece has deteriorated and so the July agreement is no longer applicable, she said. Instead, private investors must bear a larger share of losses and must also increase their capital as a way of creating a firewall against the spread of financial contagion.

"Whoever is in favor of having private creditors participate in improving Greece's debt sustainability must also ensure that protection against contagion is also part of the deal. Anything else would be negligent," Ms. Merkel said. "No one should be too big to fail ever again."