'For Psychological Reasons' Germany May Support Euro Firewall Increase

Germany has staunchly opposed increasing the euro backstop fund, despite international pressure to strengthen the firewall. But now there are signs that Merkel's government may reconsider. According to a newspaper report, Berlin knows it won't be able to resist the pressure for much longer.

The Reichstag building in Berlin. Germany may reconsider its opposition to boosting the euro backstop fund.

The Reichstag building in Berlin. Germany may reconsider its opposition to boosting the euro backstop fund.

Officially, it's not even on the agenda. But it's safe to bet that the euro rescue fund will be one of the most hotly discussed topics at the European Union summit on Thursday. More specifically, the European heads of state and government meeting in Brussels will debate the question of whether the fund is big enough or should be increased.

Now it seems that German Chancellor Angela Merkel may be backing away from her resistance to boosting the fund, which has so far proved a major stumbling block.

The European Commission and the majority of euro-zone members are pushing for the €250 billion ($330 billion) left over from the current, temporary bailout fund, the European Financial Stability Facility (EFSF), to be combined with the €500 billion allocated to its successor, the permanent European Stability Mechanism (ESM), which is due to come into operation in July. That would create a pot worth three-quarters of a trillion euros. The International Monetary Fund and a number of G-20 nations have also called for the size of the ESM to be increased. The demand is based on fears that the ESM would not be large enough to bail out Spain or Italy should they be engulfed by contagion from the crisis.

Citing government sources, German newspaper Süddeutsche Zeitung reported on Wednesday that Merkel was considering dropping her opposition to an increase, though. Sources in Berlin said that, although Merkel still did not think that an increase was necessary "in concrete terms," the "rest of the world" had become so fixated on the issue that it was now necessary for "psychological reasons." Berlin "will not be able to resist this pressure in the long term," the unnamed officials said.

The newspaper reported that the German government now thought it was conceivable that, instead of the ESM replacing the EFSF in summer, both funds could operate in parallel for one year. Under this scenario, Germany would have to contribute €22 billion to the ESM's paid-in capital as well as providing guarantees worth around €280 billion, instead of the planned limit of €211 billion.

Wait-and-See Approach

The German government had previously resisted attempts to increase the size of the ESM. Berlin wants to first wait and see how the current rescue efforts for Greece go before it makes a decision. By March 10 it is expected to be clear whether the private-sector debt haircut for Greece will be a success or not. Finance Minister Wolfgang Schäuble said on Wednesday that the size of the rescue fund will only be reviewed later in March.

Horst Seehofer, leader of the conservative Christian Social Union, the Bavarian sister party to Merkel's Christian Democratic Union, said that the coalition government -- which consists of the CDU, the CSU and the business-friendly Free Democrats (FDP) -- would have to address the issue of the increase. Seehofer said at a CSU meeting in Munich on Wednesday that both the chancellor and Schäuble had signaled as much to him last week, saying that "the issue is bearing down on us."

EU leaders also plan to push forward with the European fiscal compact at the summit. At the close of the meeting on Friday, the participating countries will sign the pact, which includes provisions for national "debt brakes" and automatic sanctions for deficit offenders. The pact, which was Merkel's brainchild, was given the green light at an EU summit in January. A total of 25 EU member states are due to sign it, with the exception of the United Kingdom and Czech Republic. Earlier this week, the Irish government announced it would hold a referendum on the pact.

dgs -- with wires

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