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German Votes and Finnish Side Deals Threaten the Greek Rescue

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Getting the July 21 reforms passed gets more complicated.

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As summer 2011 draws to a miserable end, the complicated task of pushing those half-measure July 21 reforms through increasingly skeptical Eurozone parliaments begins.

Most attention is on Germany, where taxpayer hostility to further rescue of the region's troubled economies has been on the rise since the beginning of the crisis. Add in the increasingly gloomy outlook for the German economy itself, with consumer confidence plummeting and key indicators on the decline, and there is little appetite for the kind of big, sacrificial underwriting the markets currently expect of that country.

German chancellor Angela Merkel, caught in the intense crossfire between those critics who claim she has already given away too much in the course of the sovereign debt crisis and its multiple multi-billion euro bailouts of Greece, Ireland and Portugal so far, and those – including her former mentor and predecessor Helmut Kohl -- who feel she and her fellow leaders have not done nearly enough, has a tricky September coming up, with the first sticking point due September 7, when the German constitutional court will vote on the very legality of those bailouts as the Bundestag holds its first vote on the new 109 billion euro Greek rescue package.

It's unlikely that things will go against Merkel in any definitive way, but she's already canceled a visit to Russia to shepherd the
vote and deal with expected fall-out, especially if the high court gives more power over bailout deals to the Bundestag, further
complicating any future rescue efforts.

On September 23, the Bundestag is expected to pass the final details of the July reforms, including the crucial expansion of the European Financial Stability Facility, but opposition to it from both inside and outside Merkel's coalition has momentum, and only serves to weaken an increasingly beleaguered chancellor.

Adding to fears about the passage of the July reform package is the controversial unilateral agreement between Finland and Greece, in which Finland demanded collateral against its involvement in Greece's second bailout.

The Finnish side deal, which provoked cries of outrage from other creditor countries and the possibility of copycat claims from other
small, increasingly upset nations such as Austria, Slovenia and Slovakia, was the topic of much discussion between eurozone leaders over the weekend. On Monday, the Finnish finance minister announced that he was searching for a "collateral model that all (of Europe) can approve," a small sign that the Finns might be willing to back down. Nonetheless, the controversy is seen as another troubling sign that the many-headed beast that is the eurozone may yet fumble the second Greek bailout.

Time for some less depressing news and/or speculation? According to Klaus Regling, the influential German at the head of the
soon-to-be-(hopefully)-transformed EFSF, the entire crisis will be over and done with by 2014. At times, Regling exudes optimism to the point of excess," says Der Spiegel in its profile of Regling and the EFSF.

'The fundamentals are improving in all countries in the euro zone,' he says. According to Regling, the currency zone is in a better position than the United States and Japan when it comes to government debt and budget deficits. 'For example, the US deficit is three times as high as the deficit in the euro zone,' he says."

The eurozone has passed through the worst already, he opines, and done valuable work in restoring its fundamentals. He points to Ireland as a shining example of a country that has bounced back from financial death and "regained a large part of its competitiveness. 'The financial markets just need to properly recognize that.'

Such optimism may be incongruous in the current atmosphere, but as the grueling task of getting even the widely dismissed July 21 reforms through 17 European parliaments unwinds in the face of a worsening economic outlook and increasing political squabbling, Regling's happy talk might be something to bookmark for future reference, if only as a memory of happier times.

Meanwhile, though Ireland has been rebounding well despite market indifference, Greece definitely hasn't. Anxiety over the possible
collapse of the second bailout has already sent Greek bond yields to record highs last week, while analysts suggest that its economy could contract by as much as 6% this year, more than the already grim 4.5% already predicted, and further throwing its deficit reduction attempts off track. Again, it's going to come back to Greece this fall, for better or worse.
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