The German Parliament approved an expansion of the European bailout fund, the EFSF, today, agreeing to a two month-old solution in the European banking crisis that has already been rendered obsolete. The sweeping nature of the passage, however, provided a signal to the world that Germany will meet responsibilities to Greece.

The vote passed the Bundestag by a large majority — 523 in favor to 85 against, with three abstentions.

The Germans were the latest member nation to approve an increase to the European Financial Stability Fund, which was established in the wake of the 2008 financial crisis. All 17 eurozone countries need to vote before the proposed changes can go into effect. So far, at least nine have said yes.

This only brings the EFSF from €250 billion to €440 billion. The numbers being thrown around now to ring-fence Spain and Italy are more like €2-3 trillion. More votes from eurozone countries on changes to the EFSF are coming in the next couple weeks.

I would just add, to those coming late to this issue, that I would really stress that this is not a sovereign debt crisis. Few of the countries impacted by the crisis were in debt before the Great Recession. The introduction of the euro itself did far more to cause this disaster than “runaway spending” or anything else. And now we’re in a situation that’s a European banking crisis, with the indebted nations as a pass-through.

EK: And if some of these dominoes fall, how bad are things likely to get?

DL: What’s really at stake here is the European banking system. These countries might be relatively small, but if you just look at Greece, Ireland and Portugal, that’s $1 trillion in sovereign debt. If you add Spain, that’s another trillion. If you add Italy, that’s another $1.9 trillion. If the European banks take the hit, that could really cause another Lehman moment. It would be a credit crunch that would throw the European economy into a meaningful recession [...]

EK: But there’s another side to this too, right? Part of the problems in Greece and Ireland and elsewhere were driven by bad loans from German and French banks, and part of the difficulty these countries are having getting back on a growth path is that they’re trying to keep their membership in the euro zone, and that has meant abiding by a tight monetary policy and a strong currency that countries in these sorts of situations would usually have abandoned long ago.

DL: I agree with you. It’s like the housing bubble in the United States. You couldn’t have had a bubble without the financing. In Europe, the debt bubble was financed by German and French banks. So for them to throw all the blame on the profligacy of the Greeks or the Spanish housing bubble is ridiculous. So just in terms of the blame game, it’s unfair just to blame the Greeks. But in terms of a solution, that’s a big part of the problem. Once you’re in a fixed exchange rate and you have these huge imbalances, they can’t be redressed without economic collapse. So the Germans and the French don’t want the Greeks to default because that will force French and German banks to recognize losses and then they’ll have a banking crisis. It’s easier for them to keep these countries afloat than to bail out the banks. But this is not a sustainable situation. Something has to give.

That’s a pretty good nutshell version of what’s going on. The bigger countries don’t want to admit their banks made bad loans. They’d rather engage in a morality play and blame this on the periphery countries. But the bailout money is really being handed to the banks.