10/11/2011 08:28 EDT | Updated 12/11/2011 05:12 EST

Greece Debt Crisis: Fate Of Europe's Financial System Rests In Slovakia's Hands


BRATISLAVA, Slovakia - Slovakia's Parliament rejected a key euro bailout bill Tuesday, threatening Europe-wide efforts to ease a debt crisis that is threatening the global economy. The vote triggered the collapse of the government, but the outgoing prime minister and her main opponent both said they would now work to approve the bill quickly.

The agreement to talk came shortly after Parliament voted against an expanded euro bailout fund — a vote that Prime Minister Iveta Radicova had tied to a confidence measure. Parliament is scheduled to convene again Thursday, but it is not clear when another vote will be held.

The eyes of officials and investors around the world are on the small central European country because expanding the fund requires the approval of all 17 countries that use the euro currency. Sixteen countries have already approved, and now Slovakia, with a population of just 5.5 million people, holds in its hands the fate the financial plans of the wider 17-nation eurozone and its 332 million citizens — and by extension, the global economy.

But the statements of the country's leading politicians late Tuesday left little doubt the Slovakian Parliament would approve the measure.

"We decided that we have to do it as soon as possible," Radicova said after announcing her party would hold talks with the primary opposition party, Smer-Social Democracy, led by former Prime Minister Robert Fico.

Fico took the same line. "Slovakia has to approve the fund," he said.

Fico and his party had always supported expanding the fund expansion in principle, but had said it would vote yes only if the government agreed to call early elections.

Although approval of the measure seems likely, the drama and brinkmanship highlighted what has become a major issue in Europe's debt saga: In a system where unanimity is required, even small countries wield great power.

Because major eurozone policies need the approval of all 17 countries that use the currency, Slovakia's vote — the last — carried immense weight. For weeks it appeared certain it would reject boosting the bailout fund, unnerving financial markets and threatening the future of Europe's plans to fight the crisis.

Experts said EU officials could possibly find a way around a Slovakian rejection of the bill to boost the powers and size of the bailout fund, the European Financial Stability Facility, or ESFS — but that doing so would carry costs to European unity.

In the longer-term, the drama seems sure to add momentum to the push for nimbler rules to govern the 17-country eurozone, where government reaction to the unfolding crisis has seemed for many months to be behind the curve.

That push has been gathering momentum for some time.

In August, the leaders of France and Germany, President Nicolas Sarkozy and Chancellor Angela Merkel, proposed that the heads of the eurozone countries elect the president of a new "economic government" who would direct regular summits to respond to the continent's financial crisis.

And in September, Jose Manuel Barroso. the president of the European Commission — the European Union's executive arm — decried what he called "the constraint of unanimity."

"The pace of our joint endeavour cannot be dictated by the slowest," Barroso told the European Parliament.

At issue now is an agreement reached by the eurozone leaders in July 21 to enlarge the EFSF's capital guarantee from €440 billion to €780 billion. Slovakia would contribute about 1 per cent, or €7.7 billion. In addition, if the changes are approved, the facility would have new powers and able to prop up government bond markets and help put new capital reserves against losses in banks.

Although 16 countries have given the thumbs-up, approval of the changes has found itself in potential jeopardy because of the opposition of a junior member of Slovakia's governing coalition, the Freedom and Solidarity Party. The party's chairman, Richard Sulik, calls the expanded bailout fund "a road to hell" and has vowed to block it.

While the need for unanimity can render decision-making in the eurozone slow and cumbersome, it does not mean that nothing ever gets done. In the end it usually does.

For example, Ireland's government fell shortly after it signed up to stringent austerity measures in return for a bailout. But the new government eventually embraced the bailout deal — even after having campaigned against it.

And when Finland's new parliament threatened to block rescue loans to Portugal, officials patched together a list of conditions that allowed lawmakers to approve the loan and save face at the same time.

That list of conditions led to a monthslong fight over a Finnish request for collateral. But even that dispute was eventually resolved through compromise.

And the Slovak parliament now seems likely approve expanding the stability facility in the end, as well. While unanimity is necessary, the pressure that can be brought to bear on recalcitrant leaders is huge.

But the acrimonious disputes and threats of vetoes diminish the confidence of the markets and citizens, many of whom no longer seem to believe that the EU has the will to protect them from a worsening economic crisis.

The euro cannot flourish in a system where 17 largely sovereign countries need to agree unanimously and very small countries can hold great sway, Simon Tilford, chief economist at the London-based Center for European Reform, said Tuesday.

"Either they integrate much more fully or the whole thing comes apart," Tilford said.


Melvin reported from Brussels. Gabriele Steinhauser contributed to this report from Brussels. Don Melvin can be reached at