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Slovakia Holds Up Increased European Bailout Fund

Europe still hasn’t finished its already-obsolete response to their banking crisis, which boosted the amount of euro in their bailout fund, the EFSF. All 17 countries in the Eurozone must sign off on this, and donate their share to the fund. That includes Germany and France, as well as the smaller countries on the periphery. And one of those countries is balking.

As European leaders scramble to stop Europe’s debt woes from triggering another global financial crisis, this sleepy little country known more for its medieval castles and fermented sheep’s milk is holding their grand rescue plan hostage.

Under the rules governing the 17 nations that share the euro, an expanded rescue fund for Europe’s ailing nations and troubled big banks must be approved by the parliaments of every country in the currency union. A yes vote by the Netherlands on Thursday left small, stubborn Slovakia as the biggest holdout, giving it outsize power to upend the plan largely shaped by the major European nations of Germany and France […]

What would have happened, for instance, if Washington needed the approval of all 50 states before proceeding with its plan to rescue ailing U.S. financial institutions in the wake of the collapse of Lehman Brothers in September 2008? But the euro zone is a confederation of member states lacking a powerful executive and legislative branch. The situation illustrates, critics say, the built-in flaws of the currency union.

This is certainly true. But what if one state, say Tennessee, was asked to contribute 12% of its GDP into the bailout fund? Because that’s what Slovakia is being asked to do. The vote they will take would add $10 billion toward the EFSF, a step that leaders in the country don’t want to take. Especially because this is for the too-small initial boost to the bailout fund, and more asks for more money could follow down the road. Richard Sulik, the speaker of the parliament in Slovakia, is standing between French and German banks and their money. I would get a food taster if I were him.

Sulik’s Freedom and Solidarity Party calls the plan an unfair bailout of profligate Greeks and fat-cat German and French bankers that poor Slovaks can’t afford. It is vowing to block the rescue fund in a vote next week or make its passage incumbent on a rule that could give this nation of 5.4 million veto power over the use of bailout funds — a move that could spark a showdown with its bigger neighbors.

“Our goal here is to prevent the passage of this rescue fund,” Sulik said. “This country should not have to pay for Greek pensions or French banks.”

Speaking from his office, amply stocked with a humidor and wet bar, he added that if he were an investor in troubled European debt right now, “I, too, would feel bad about what we are doing.”

The Prime Minister, Iveta Radicova, supports the ratification vote, but she needs Sulik’s support. A yes vote will probably collapse the government in Slovakia.

European leaders have already whizzed over to the next bailout, and are preparing ways to leverage the EFSF into a kind of CDO, and to recapitalize the continent’s banks. But without ratification from Slovakia, it will all come crashing down. If you thought the Eurozone was unworkable before, one visit to Slovakia will stiffen that opinion.

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David Dayen

David Dayen