Increasing the eurozone rescue fund – and determining the extent to which Spain may need its help – will be under discussion today and tomorrow (30-31 March) as European finance ministers meet in Copenhagen.
The eurozome finance chiefs are set to decide formally to run the €500-billion permanent European Stability Mechanism (ESM) alongside the €200 billion already committed to Ireland and Portugal through a temporary fund, the European Financial Stability Facility (EFSF).
They might also allow the temporary fund’s unused €240 billion to be tapped “in exceptional circumstances” until mid-2013, when the EFSF will be phased out.
That would give the combined fund a potential €940 billion in resources.
Change of tune by Merkel
The higher figure might be approved after a shift in position by German Chancellor Angela Merkel – who originally opposed running the EFSF’s unspent funds alongside the ESM. The increased reserve is designed to boost confidence in the eurozone enough to encourage further investment using the firepower of the International Monetary Fund.
Although not on the agenda of the unofficial meetings in Copenhagen, the worsening economic situation in Spain – which might have to call on the boosted fund for help – is likely to be the focus of discussion.
Prime Minister Mariano Rajoy has ruled out asking for European aid or injecting state money, but loan defaults have reached an 18-year peak, leaving banks owed €1.8 trillion, which may leave little option but to seek bailout.
Reuters reported on 26 March that European Competition Commissioner Joaquin Almunia told Spanish journalists that Madrid has three options to clean up its banking sector: using Spanish public funds, finding private investment or applying for European aid.
Eurozone performance continues to diverge
European Economic and Monetary Affairs Commissioner Olli Rehn has dismissed as "unfounded" reports in a number of Spanish newspapers that the EU was putting pressure on Madrid to accept aid.
The Copenhagen meeting takes place against a backdrop of continuing divergence in eurozone economic performance.
Italy's 10-year borrowing costs fell to 5.24% yesterday, the lowest since August 2011, in an auction that continued a trend of easing tensions.
But the OECD, which produces quarterly figures showing year-on-year growth, warned that the eurozone periphery remained in a fragile state and would struggle to grow for the rest of the year.
The OECD said that German growth would remain firm for the first half of this year, underlining the strong performance of Europe’s chief paymaster.
In March German unemployment fell to its lowest level – 6.7% – since the country’s reunification in 1989.