The Slovaks were scrambling late Tuesday to rearrange a new vote after the government there became the first to fall in Europe over opposition to bailouts. But the rejection nevertheless seemed destined to rattle already jittery investors and further sap the confidence of world leaders in Europeans’ ability to solve their own problems.
The dizzying power of Slovakia to scupper a major rescue effort largely crafted by far larger Germany and France has illustrated the quixotic nature of European governance and the region’s bungled bailout attempts. Delays in resolving the crisis are heightening fears that bad debt in Europe could infect global banks in much the same way that U.S. subprime mortgages did after the collapse of Lehman Brothers in September 2008.
On Tuesday, the most populist of the four parties in Slovak Prime Minister Iveta Radicova’s ruling coalition made good on its threat to block the fund. The party said it would not let poor, debt-averse Slovaks, who have one of the lowest average wages in Europe, help foot the bill to save profligate Greeks and the big banks that own their debt.
“I’d rather feel ashamed in Brussels than in front of my children,” Richard Sulik, head of the rebel Freedom and Solidarity Party, proudly declared in the Slovak parliament, referring to the European Union’s administrative capital in Belgium. Sulik’s staunchly free-market party has argued that approving the bailouts would only mean more debt for countries that have already borrowed too much.
Disunity worries investors
Radicova, insisting that Slovakia had to do its part to support its neighbors, staked her job on the outcome of Tuesday’s vote, with the result bringing down her government. For the Europeans, hope now centers on a pledge by the opposition to throw its support behind the fund’s approval in exchange for early elections. Slovak politicians engaged in a bout of fierce horse-trading, and a fresh vote appeared likely in the coming days.
“It is a sad reminder of how the euro zone depends on the decisions of individual nations with competing interests,” said Paola Subacchi, head of international economics at Chatham House, a London-based think tank. “It’s a reminder that Europe is not a federal state, and that one populist party can derail its efforts.”
If Slovakia fails to approve the measure, though, it could force the leaders of euro-zone nations to reopen thorny negotiations over the rescue fund just as Europe appears to be running out of time.
Already, investor concerns have spread from relatively small Greece, Portugal and Ireland to the giant economy of massively indebted Italy, and signs are emerging that the weakest of the big banks that own the debt of troubled European nations are buckling under losses. On Sunday, French and Belgian officials were forced to nationalize Dexia, Belgium’s largest bank, saddled with more than $700 billion in exposure to debt from troubled European nations. On Monday, Austria’s Erste Group Bank announced that it was likely to lose up to $1 billion this year, partly because of the ongoing debt crisis.
But increasingly, Europe’s woes appear to be as much political as economic, with the region unable to reach a consensus on how far it is really prepared to go to resolve the crisis. Even the rescue fund the Slovaks were being asked to ratify Tuesday is already being dismissed by most analysts as too little, too late, with talk now that $2 trillion or more may ultimately be needed to fully address the crisis.
Resentment in Slovakia
The expanded fund — officially known as the European Financial Stability Facility — is meant to bolster Europe’s economic defenses, allowing moneys to be used faster to prop up not only ailing countries in crisis but also the banks holding their debt. Each nation in the euro zone is being expected to contribute to the fund, with Slovakia being asked to pony up about $10.5 billion toward the $588 billion package.
But in post-communist Slovakia, which adopted the euro only two years ago, the vote over the bailout fund became a rallying cry against the notion of propping up its richer neighbors. Unlike Slovakia, which ended generous social benefits and watered down job-security rules to become more competitive in recent years, nations such as Greece and Italy were portrayed in local newspaper editorials and on Slovak talk shows as spoiled rich kids looking for others to pay their bills.
Radicova delivered an impassioned defense of the fund Tuesday, imploring her peers to do their duty for the greater good of a European Union to which Slovakia, for better or worse, has hitched its fortunes.
“I beg you, trust this government,” she said, saying that Slovak “reliability” was at stake.
The rejection of the plan in Bratislava had at least one immediate effect: It threw one of the region’s stable countries — a former Eastern Bloc nation of 5.4 million that is now one of the euro zone’s rare economic dynamos — into a deep political crisis.
“What we do know is that the government is falling because of this vote,” said Grigorij Mesežnikov, a Bratislava-based political analyst. “I do believe the fund will be approved here eventually, but it will come at a political price for Slovakia.”