Germany is open to temporarily boosting the eurozone's financial firewall to €700 billion ($930 billion), Chancellor Angela Merkel said Monday, setting the stage for tough talks in which some governments will push for an even bigger increase to protect Italy and Spain.
Merkel's statement is a turnaround from Germany, which has so far insisted there was no need to increase the lending capacity of the bailout funds beyond the planned €500 billion, despite uncertainty over the ability of Rome and Madrid to repay their debts.
However, it is questionable whether a temporary increase to €700 billion — of which some €200 billion have already been committed to previous bailouts — will be enough to convince the rest of the world that the eurozone is doing enough to stop its debt crisis from spreading.
The 17 euro countries are currently debating how to move from their old bailout fund — the €440 billion European Financial Stability Facility, which is already providing some €200 billion in loans to Greece, Ireland and Portugal — to a new, permanent rescue fund — the €500 billion European Stability Mechanism.
The ESM is set to come into force in July, but under current policy old bailouts would have to be subtracted from its overall capacity, meaning that it could give only some €300 billion in new loans. That is seen as way too little to effectively help large economies like Italy and Spain, which together have more than €2.5 trillion in debts.
On Monday, Merkel said her government was open to let the €200 billion in existing commitments run in parallel to the ESM, which would raise the overall capacity to some €700 billion until the old loans have been paid back.
At a new conference at her party's headquarters in Berlin, Merkel appeared confident that a decision on boosting funds could be taken at a meeting of eurozone finance ministers in Copenhagen on Friday. She added that that should also convince other big economies to join the eurozone in sending more money to the International Monetary Fund, which would give the currency union even more protection.
However, an increase to just €700 billion falls short of demands from the European Commission, the European Union's executive, and other euro countries, which would prefer seeing the bailout capacity rise to €940 billion.
In a paper prepared for the eurozone finance ministries, the Commission also stated that raising the ceiling to €700 billion "would most likely be insufficient to unlock resource from other G20 partners."