Jose Manuel Barroso, the European Commission president, has called for a “rapid reassessment” of the euro zone’s €440-billion ($622-billion U.S.) rescue fund as he acknowledged that the new powers granted it just two weeks ago were insufficient to contain the current crisis.
Several people close to Mr. Barroso said he was advocating an increase in the size of the fund, known as the European financial stability facility, to convince financial markets that it was capable of mounting bail-outs for Italy and Spain, if necessary, and halt a debt crisis that has threatened the single currency.
But Mr. Barroso’s intervention drew a scathing response from Germany, which is the biggest underwriter of the EFSF, and has consistently rejected calls to top it up.
“It is not clear how reopening the debate just two weeks after the summit can lead to calming the markets,” said a senior official in Berlin. Other German officials suggested that Mr. Barroso was coming to be regarded as a loose cannon in the euro zone debate.
The exchange reflected the mounting frustration and tension among European leaders as a crisis that started in Greece has now moved on from the euro zone’s periphery to infect Italy and Spain, two of its biggest economies.
Euro zone leaders argued that they had turned the corner at a July 21 summit in Brussels when they agreed a new €109-billion bail-out for Greece and equipped the EFSF with new powers, including the ability to purchase bonds in secondary markets, extend short-term lines of credit and other precautionary measures.
At a late-night news conference, Herman Van Rompuy, the European Council president, had touted the enhanced EFSF as a “fire brigade” that could quickly douse flames before they spread
But in a letter to European heads of government, Mr. Barroso acknowledged that “bold decisions” taken at the summit “are not having their intended effect on the markets”.
“We need also to consider how to further improve the effectiveness of both the EFSF and the ESM in order to address the current contagion,” Mr. Barroso wrote, referring to the European Stabilisation Mechanism, a permanent €500-billion fund that will replace the temporary EFSF in 2013.
In a critique that some saw as ironic, the president also blamed “undisciplined communication” by European leaders for undermining the most recent Greece package.
This week’s turbulence has yet again revealed a mismatch between the speed of financial markets and the delays in making and implementing EU policy. Officials say it will be weeks -- and possibly months -- before the latest changes to the EFSF can be put to use.
They must iron out technical details and then draft a legal text before seeking ratification from each of the 17 eurozone governments - a process that would require parliamentary approval in most of those states.
It has also refocused attention on the limited capacity of the EFSF, which was created in the aftermath of the first Greece bail-out more than a year ago. It issues bonds backed by the euro zone members, and then lends the proceeds to stricken governments with tough conditions attached.
In addition to Germany, other triple-A rated guarantors, including the Netherlands and Finland, have opposed increases amid deep discontent from their taxpayers. There is less opposition in France, although analysts have warned that it could put its own triple-A credit rating at risk if it is forced to shoulder a heavier guarantee.
Aides to Mr Barroso, who is on vacation in his native Portugal, suggested that he was well aware of the controversy his letter would generate, but believed that the crisis had reached a critical phase and that governments must return in September ready to take action.