Merkel accepts eurozone firewall increase

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German Chancellor Angela Merkel has signalled for the first time that she was prepared to compromise on boosting funds available for bailing out struggling eurozone countries, paving the way for an increase in the bloc's firewall to contain the debt crisis.

Merkel said yesterday (26 March) she could imagine that the bloc's two rescue funds could run in parallel so that a total of €500 billion in new funds were available for troubled countries.

The only way to accomplish this, without accelerating payments into the new European Stability Mechanism (ESM), would be to allow an existing fund, the European Financial Stability Facility (EFSF), to continue to be an active lender between mid-2012 and mid-2013.

“We say the ESM should remain permanently at the €500 billion level, but in order for us to have €500 billion in available money, then we can imagine … allowing the programmes … to run in parallel,” Merkel said at a meeting of her conservative Christian Democrats party.

Decision due by end of March

Germany has been under pressure from international partners to agree to an increase in the eurozone's firewall, with some countries like Britain and the United States making clear that without it, they will refuse to make additional funds available through the International Monetary Fund.

European leaders agreed last year to take another look at their firewall by the end of March and finance ministers are expected to discuss bolstering it at an informal meeting in Copenhagen later this week.

The EFSF still has approximately €240 billion in unused funds and government sources told Reuters that Berlin was prepared to accept that these be made available after the ESM was up and running in mid-2012.

Merkel faces political questions

Any unused funds remaining in the EFSF midway through 2013 would be cancelled, with the ESM remaining the sole fund capable of doling out new loans, sources said.

Merkel has resisted any increase because she risks a political backlash from allies in her coalition if it means any increase in Germany’s overall financial guarantees for its partners.

Getting all the parties in Merkel's centre-right coalition on board for this solution could prove difficult, however, as it would likely lead to an increase in Berlin's guarantees to some €290 billion from €211 billion.

The head of the Bavarian Christian Social Union (CSU) Horst Seehofer said on Monday that any increase above €211 billion remained a "red line" for him.

The only other country that has not publicly backed the increase is Finland, where increasing the size of the eurozone bailout funds has proved politically controversial.

However Finnish Prime Minister Jyrki Katainen told the Financial Times on 24 March he was willing to find a “good compromise”.

"Each member state feels a tension between two considerations," Italian Prime Minister Mario Monti told the Japanese newspaper Nikkei in an interview published on its English-language website.

"Endowing financially a firewall means putting up money ... On the other hand, the higher the firewalls, the least likely it is that they have to be actually used, because the deterrence effect on market speculation may discourage speculation altogether."

Asked whether the firewall's size should be raised to €700 billion - one of the options being debated - Monti said: “I say the higher the better. But there is a realism also to be taken into account.”

"We need a real firewall, instead of constantly spending money on fire extinguishers" ALDE Group Leader Guy Verhofstadt said.?

"Member States must acknowledge that by having procrastinated, the decision to establish a real firewall has become more costly.  We have escaped the worst for the moment just thanks to the ECB intervention in the market over the last three months".

Eurozone leaders are set to review the €500-billion limit on the joint lending capacity of their temporary and permanent bailout funds – the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) – at the informal meeting of finance ministers in Copenhagen this weekend (30 and 31 March).

If they decide to merge the funds, they will create a firewall of €750 billion which would help convince markets that they are committed to bringing the crisis under control.

The European Central Bank supports such an increase as do policymakers around the world who are considering more than doubling the International Monetary Fund's resources by $600 billion (€446 billion).

A bigger European rescue fund is a condition for major non-European economies before they lend more money to the IMF.

  • 30-31 March 2012: Informal meeting of European finance ministers in Copenhagen expected to approve the firewall change
  • European Financial Stability FacilityWebsite

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