The mouse that roared: How tiny Slovakia could prolong Europe's massive debt crisis

The Slovakian parliament last night voted against the expansion of the European bailout fund, the EFSF, adding another level of uncertainty to the already volatile financial situation in the European Union.

Slovakia was the last of the 17 eurozone countries to approve the measure, which cannot be implemented without ratification by all members. The vote does not just mean a most unwelcome obstacle for the eurozone’s attempts to get a grip on the sovereign debt crisis engulfing several of its southern members. It also caused the collapse of the Slovakian government, which had linked its survival to a positive outcome of the poll.

The events in Bratislava coincided with an announcement by the outgoing president of the European Central Bank, Jean-Claude Trichet, who warned in his final appearance at the European Parliament in Brussels that the debt crisis in Europe had now reached systemic dimensions.

"The high interconnectedness in the EU financial system has led to a rapidly rising risk of significant contagion. It threatens financial stability in the EU as a whole and adversely impacts the real economy in Europe and beyond," Mr. Trichet said.

Slovaks: How can we afford to help bail out Greeks?

The result in the Slovakian vote was due to the refusal of one of the four government coalition parties, the Freedom and Solidarity (SaS) party, to support Prime Minister Iveta Radicova.

The conservative SaS argues that Slovakian taxpayers, earning on average 760 euros per month, which is just a few euros above the Greek minimum wage, should not have to bail out countries like Greece, which – unlike Slovakia – failed to implement necessary austerity measures to bring down state debt and cut budget deficits.

“This vote is due in part to domestic politics,” says Jana Kobzova of the London-based think tank European Council on Foreign Relations. “But it is also a clear warning by one of the smaller eurozone members that without fiscal discipline the common currency will not work. Basically, the Slovaks say they’re not prepared to pay for the eurozone’s major design fault: the lack of economic governance.”

Markets anxious for news

Prime Minister Radicova said that the Slovakian parliament would vote on the issue again within the next few days, a move allowed under the Constitution. The opposition, having reached their primary goal by bringing down the government, signaled they would support the vote in the second round, giving some reassurance to financial markets around the world, which are anxiously waiting for decisive action against the sovereign debt crisis that is already turning into a banking crisis.

Later on Wednesday, the president of the EU Commission, Manuel Barroso, is to unveil proposals designed to overcome the debt crisis by refinancing struggling European banks and bringing down the debt burden for Greece.

"This crisis started with the financial crisis [of 2008]. Three years later, we are still facing doubts about the capacity of the banks to cope with, for instance, their exposure to sovereign risk," Amadeu Altafaj Tardio, a commission spokesman, told AP Television News on Wednesday.

In a sign that financial markets seem to be pining for such a coordinated plan, banking shares across Europe went up ahead of the announcement.