EU Bailout Still Faces Obstacles

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The parliament of the tiny European alpine state of Slovenia on Tuesday approved reforms to the European bailout program. The recent fall of the Slovene government led to concern in the markets that Slovenia might reject the measure, but such misinterpretations illustrate a general ignorance about this extremely levelheaded state. Slovenia is one of a handful of states that most in the know agree is made up of "good Europeans," and it did not let domestic political disagreements stand in the way of ratifying the bailout accord 49-4. In fact, Slovenia has not caused any problems for Europe since 1991, when its declaration of independence set the breakup of Yugoslavia in motion. It was also among the first to accede to both the European Union and NATO a few years later.

But despite Slovenia's approval, Europe's bailout program faces obstacles ahead. Several states must still ratify changes to the bailout program - known as the European Financial Stability Facility (EFSF) - before it can take effect. Three of these states in particular offer more substantial causes for concern.

The first and most troublesome is Slovakia. Slovak disapproval does not stem from opposition to the euro, rather to the Slovaks' enthusiasm for the currency. Slovakia is one of only three Central European states in the eurozone, and it is arguably the EU state that had to make the most painful changes in order to qualify for eurozone membership. They see membership as a prize to be won, and are hardly impressed with states like Greece, who lied about their situation to falsely qualify as eurozone members. Slovak opposition is simple: if you want to be in the euro, implement austerity measures like we did.

STRATFOR expects Slovak opposition to eventually relent, or perhaps simply be overruled. This is not the first time they have dithered on EFSF ratification. The dominant Western European eurozone states are pleased to have Slovakia in the currency area, but they do not accord the Slovaks the same degree of respect they hold for each other. They see Slovakia as a small, poor member of a club mostly comprising rich, important states. Last time the EFSF came up for ratification, the Germans made it clear that they would force the program into operation regardless of what happened in Slovakia, and that blocking ratification would have unpleasant (if unnamed) results for Bratislava.

Germany cannot simply overrule Finland, the second state. Like the Slovenes, the Finns are considered "good Europeans," but unlike the Slovaks they are considered both wealthy and fully Western. Finlands April elections largely turned on the issue of the EFSF and the ongoing bailout efforts, with the Finnish electorate selecting a somewhat anti-European government. That government is demanding collateral in exchange for any new bailout funds.

STRATFOR expects this problem can also be handled. While Germany cannot ignore Finland (the country only contributes 1.93 percent of total EFSF funding), it can afford to grumble and write a slightly larger check.

In fact, Germany is the only country that STRATFOR worries may not pass the reforms. All three parties of the German center-right government are divided within themselves on the issue of bailouts. When the current EFSF reforms were agreed to in July, STRATFOR saw them as a commitment from Germany to do whatever was necessary to cement its position as Europe's dominant power. The changes to the mechanism do more than enhance its reach, allow it to bail out banks and grant better loan terms to recipient states. They also greatly enhance German power in determining when bailouts happen and how they will be implemented, and do so to the determent of other eurozone states and pre-existing EU institutions. Put simply, STRATFOR sees the EFSF effort as Germanys best bet for remaking Europe in its own image.

But the German leadership cannot tell this to the German parliament - much less the German populace - in an honest and open manner. Imagine a debate in the Bundestag over the merits and methods for extending German power across Europe. The impact on the European system would keep STRATFOR analysts very busy.

Instead, the German government is limited to offering empty-sounding platitudes about European unity and responsibility. It's not that the governments line is inaccurate, it's just that it doesnt appeal to a German public that feels it has already paid dearly for European unity. Germany, it feels, subsidized the European Union for decades; shouldered the bill for rehabilitating the former East Germany while still helping pay for the recovery of the other former Soviet satellites; and accepted an artificially high conversion rate for the Deutschmark compared to the currencies of other euro founding states when the single currency was launched a decade ago.

The Bundestag votes on the EFSF reforms Thursday. The vote will most likely pass, but the doubt within German ruling parties about a policy that was written by their own government testifies to the level of distrust that already exists in this financial crisis, and to the complicated challenges that remain to be faced.

A Stratfor Intelligence Report.
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