The European Commission has recommended increasing the size of the euro zone’s rescue system from €500-billion to €940-billion ($1.2-trillion U.S.) by combining the existing, temporary bailout fund with a facility that is due to start this summer, according to an “options note” obtained by the Financial Times.
The recommendation by the Commission, the European Union’s executive branch, includes two other scenarios that would see the system increased only temporarily to either €940-billion or €700-billion before falling again to €500-billion.
But the options paper said a permanent increase would be “more streamlined and robust” and was “most likely to unlock resources from other G20 [the group of 20 leading economies]partners” – a clear reference to efforts by EU leaders to persuade non-euro zone countries to increase commitments to the International Monetary Fund.
The issue of whether to increase the size of the euro zone’s firewall to prevent instability in the region’s troubled periphery from spreading again to Spain and Italy is to be debated at a gathering of finance ministers in Copenhagen next week. The governments have a self-imposed deadline for striking a deal of the end of this month.
However, Germany has resisted increasing the rescue system and senior European officials said Berlin was still arguing that the recent calm in financial markets meant raising the firewall’s ceiling was no longer needed.
One senior European official involved in the talks said Berlin had been further hampered by snap elections called in the western state of North Rhine-Westphalia, where Angela Merkel’s Christian Democrats face a tough battle against opposition parties.
Another senior official said Berlin was likely to support a plan only if it did not require them to go back to the Bundestag for fresh approvals. The Commission-backed proposal would force the German government to get parliamentary approval to change the authorized capital stock of the new €500-billion bailout facility, the European Stability Mechanism.
The Commission’s preference would take the unused guarantees in the existing bailout fund and insert them into the new ESM. Although that would raise the ceiling initially to €940-billion, the €200-billion committed to Greece, Ireland and Portugal would eventually disappear once the bailout programs end, meaning the long-term size of the ESM would be €740-billion.
The next most ambitious plan would simply run the two funds side by side until the existing fund, the European Financial Stability Facility, expires in the middle of 2013. This plan would temporarily increase the overall system to €940-billion but only for a year. Ms. Merkel has hinted that this is her preference.
The third option would be to wind up the EFSF but allow the three bailouts to continue outside the ESM, giving the ESM its full €500-billion capacity. Under current laws, the bailouts will be rolled into the ESM, lowering its lending capacity to about €300-billion.
The Commission warns, however, that this smaller-scale option is “likely to be insufficient” to convince non-euro zone countries to double the IMF’s resources to $1-trillion, as had been proposed by Christine Lagarde, the IMF chief.
“The markets could consider the new lending capacity to be insufficient in the event that one or several large member states would need to be taken out of the market,” the paper adds.