Germany Bows to Pressure: Merkel Comes Around to Euro-Zone Firewall Boost

German Chancellor Angela Merkel and her Finance Minister Wolfgang Schäuble have long opposed a further expansion of the euro-zone bailout fund, which would expose German taxpayers to billions in new liabilities. But SPIEGEL has learned that Merkel has given up her opposition and will likely agree to strengthen the firewall later this week.

Chancellor Merkel has given up her resistance to boosting the euro zone's firewall. Zoom
AP

Chancellor Merkel has given up her resistance to boosting the euro zone's firewall.

They balked for quite some time, but SPIEGEL has learned from government sources that German Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, are planning to agree to increase the volume of the euro rescue fund.

Government sources said the two politicians, who are both members of the conservative Christian Democratic Union (CDU), no longer plan to oppose the wishes of most of the other member states in the common currency zone to combine the remaining funds of the European Financial Stability Facility (EFSF) with that of its successor, the permanent European Stability Mechanism (ESM), to create a more effective firewall to prevent a contagion effect in the euro crisis.

Originally, the plan was to replace the EFSF, which has a total capacity of €440 billion ($583 billion), with the ESM, which would initially have €500 billion at its disposal.

However, it now appears that the EFSF will be kept in operation along with the ESM. The sources said Merkel and Schäuble had agreed on a common position for the new course, namely that both funds would be kept "operational" for a transitional period. With the decision, it is possible that a deal could be reached with the remaining euro-zone member states at a meeting of European Union finance ministers in Copenhagen this weekend.

A United Front against German Position

With its tough position on the rescue funds, Germany had threatened to completely isolate itself in Copenhagen. The only remaining ally Germany had in its opposition to increasing the size of the rescue fund was Finland. But Helsinki also appears to be more flexible on the issue now. On Saturday, Finnish Prime Minister Jyrki Katainen said his government was "a bit skeptical" about boosting the fund, but that it had no "political line" on the issue.

Otherwise, virtually all euro-zone member states support an expansion of the fund, as do the International Monetary Fund (IMF), the European Commission and the European Central Bank (ECM).

Jörg Asmussen, a German member of the ECB's board, said that even if the debt crisis has calmed down, the "European firewall" still needs to be erected even higher. The EU's monetary affairs commissioner, Finland's Olli Rehn, also said Saturday there was "no room for complacency" and that the firewall needs to be reinforced. Despite reservations in Berlin and Helsinki, Rehn said he believed a deal would be reached in time for Friday's meeting in Copenhagen.

It appears that Merkel and Schäuble are changing their position to join those in support of expanding the rescue fund out of necessity. The argument made by supporters of boosting the firewall is that only the biggest possible rescue fund can provide the credible guarantees for highly indebted euro-zone member states that are needed to ensure low interest rates on government bonds, scare off speculators and, in the end, make it easier for these countries to reduce their liabilities. Critics of the euro bailout fund, however, fear it could have the opposite effect. Access to cheap capital, they warn, could lead governments of heavily indebted states to neglect their austerity efforts.

According to SPIEGEL's sources, it remains unclear how much money will be included in the funds. Talks have focused on two variants. The first would see roughly €200 billion that the EFSF has already earmarked in aid for Greece, Portugal and Ireland combined with the ESM's €500 billion volume, creating a total of €700 billion. Originally, the €200 billion was to have been included in calculations of the ESM's size.

The second model foresees both funds operating at full capacity in parallel. Under that scenario, the total size of the funds available would be €940 billion.

A New Test for Merkel's Coalition?

Depending on which variant were adopted, the potential liabilities for Germany would differ. Under the first variant, Germany would have to provide guarantees of up to €280 billion, and a maximum of €400 billion for the second option. The problem with both variants is the government's legal experts believe that either would require approval from the federal parliament, the Bundestag. Parliament has approved previous aid efforts, but it has capped German participation at a maximum of €211 billion.

A fresh vote in the Bundestag could prove to be a further test for Merkel's coalition government, which is comprised of her CDU, its Bavarian sister party, the Christian Social Union, and the business-friendly Free Democratic Party (FDP). Within the FDP and CSU, the number of members of parliament who would reject further obligations is growing.

In February, the Bundestag passed the most recent legislation on the euro rescue package, but Merkel failed to obtain a symbolically important absolute majority within her own coalition. The vote underscored a weakening of her coalition government.

dsl/SPIEGEL

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