Germany is easing its opposition to a bigger European bailout fund, officials said, smoothing the way for the world’s leading economies to secure nearly US$2 trillion in firepower to prevent further fallout from the eurozone’s sovereign debt crisis.
Finance leaders from the G20, meeting in Mexico City over the weekend, were demanding that Europe build up its war chest first and then other G20 countries would contribute extra money to the IMF. As Europe’s richest economy, Germany’s support for a larger European fund is critical.
A senior G20 official said Berlin was prepared to discuss boosting the firewall next month, but it saw no reason to increase the bailout fund for now, because the situation in financial markets has been improving.
The plan is to merge Europe’s temporary and permanent bailout funds — the European Financial Stability Fund (EFSF) and the European Stability Mechanism (ESM) — to create one 750 billion euro (US$1 trillion) fund. Increased IMF resources would back that up.
“Everyone in the eurozone and even in European Union is reasonably happy with combining the ESM and the EFSF, even Germany, but it is too early to say if this will be decided at the EU summit at the beginning of March,” said Danish Minister of the Economy Margrethe Vestager.
Denmark is the current EU president.
Merging the funds would mark a softening of Berlin’s stance. It has warned that a bigger fund would remove pressure on deeply indebted countries to enact the tough fiscal measures and economic reforms needed to bring their budgets under control.
G20 finance chiefs are piling the pressure on Germany as they try to line up the roughly US$2 trillion in resources by the time they next meet in April and draw a line under the two-year-old eurozone crisis.
“I do want to encourage Germany to take that leadership role very seriously and come up with an overall eurozone plan,” Canadian Minister of Finance Jim Flaherty said.
Some diplomats have said Germany’s reticence to back the bigger bailout plan was linked to a key vote today by German lawmakers on Greece’s new financial lifeline, another part of the broader push to ring-fence the eurozone crisis.
A European agreement next month to merge the EFSF and the ESM to create a US$1 trillion war chest would clear the way for other G20 countries in April to meet the IMF’s request for US$500 billion to US$600 billion in new resources, on top of its current US$358 billion in funds.
Put together, this would total about US$1.95 trillion in firepower. However, the G20 has no intention of easing the pressure on Europe by giving it a strong signal now that new IMF money is in the bag.
However, a G20 communique at the end of the ministerial meetings yesterday would merely state that the world’s leading economies would review the resources of the IMF in April, without setting a date for a deal, G20 officials said.
The US has said it would not provide more funds for the IMF. However, it is not standing in the way of other countries lending to the fund and is keeping up the pressure on Europe to first put forward more of its own money.
“I hope that we’re going to see and I expect we will see continued efforts by the Europeans ... to put in place a stronger, more credible firewall,” US Treasury Secretary Timothy Geithner said on Saturday.