Germany is in a war of words with the European Commission about the future shape of the stability mechanism protecting the eurozone. The Commission wants the fund to expand, but Germany is asking who will pay.
Barroso and Merkel had a heated exchange last week
When it comes to the stability of the eurozone, psychology is half the battle. That's why the European Commission is keen to make the financial rescue mechanism as robust as possible in order to show financial markets that the euro is safe. But those economies that will foot the bill - above all Germany - are stalling.
Germany says the current 750-billion-euro ($990 billion) stability fund is sufficient as it is. But Friday’s Brussels summit, eurozone members will hammer out their positions with the European Commission.
Last week's discussion between German Chancellor Angela Merkel and European Commission President Jose Manuel Barroso about the size of the European financial stability fund was described by a spokesman as "lively" – which is diplomatic speak for "heated".
Merkel is stalling on the issue, because she knows it could be the German taxpayer who foots the bills for any enlargement of the current 750-billion-euro stability fund.
What if Portugal or Spain also need a bailout?
"We've got one country making use of the fund at the moment. That's Ireland. And we're still a long way from full capacity," Merkel said. "But at the same time we have to add, like we have done since the Greek crisis, we're standing by the Euro. We will do what's needed."
But the European Commission thinks that the European Stability Fund, or ESF, is too small to soothe investors, who are already speculating about the insolvency of Portugal and even Spain.
"In the commission's view, defective lending capacity of the ESF must be reinforced and its scope of activities widened," said Olli Rehn, European Commissioner for Economic and Monetary Affairs.
The actual amount that the fund can lend out is, in practice, much lower than the 750-billion-euro headline sum, at around 250 billion euros. That's after contributions from the 17 eurozone nations, and an extra 60 billion from the common EU budget. Then the International Monetary Fun would supply an extra 50 percent on top of that. So when you've done the maths, there's actually more like 440 billion euros in the fund, just over half of which could actually be lent out.
Greece was the first euro zone nation to require financial aid from the EU
Jose Manuel Barroso wants to be prepared for when the next crisis hits by enlarging the fund, but the German Finance Minister Wolfgang Schäuble first wants to clear up the matter of who will pay for it. As the largest economy in the eurozone, Germany has to put forward the lion's share of the credit guarantee.
"We've made it clear, and that's where it stands, that we aren't prepared for an improvement and intensification of the support mechanism, unless the members of the eurozone are prepared to contribute their share," Schäuble said. "Solidarity is not a one way street."
Who should pay?
Germany and other solvent euro countries like Austria, the Netherlands and Finland have also rejected the idea that the stability fund should directly take over state bonds from heavily indebted countries like Greece. One person who should know all about it, is the head of the stability fund, Klaus Regling, but at the moment he says he sees no need to put more money in the pot.
"Of course we don't know how the global economy and the financial crisis will develop. There is no urgent need, but there is a gaping hole between the guarantee amount of around 440 billion euros and the real possibility of lending in the region of 250 billion euros," Regling said. "There may be the possibility to close the gap that has opened up, through other new mechanisms. It certainly makes sense to think about it."
But some analysts think the debate about enlarging the stability mechanism is detracting from the real issue at stake. Economics expert Clemens Fuest from the University of Oxford says ministers should focus on what happens after the summer of 2013, when the current fund runs out:
Merkel and Sarkozy are singing from the same hymn sheet
"I think at this point enlargement is not the key issue," Fuest told Deutsche Welle. "In the current situation the funds are clearly sufficient so in my view the more important question is how the fund will be reformed after 2013. And how the eurozone will deal with the fact that some highly indebted countries are unlikely to be able to pay back their debt. I mean this will not change if the fund is enlarged, and I think this is the real question."
Fuest suggests that Greece and Ireland need some form of debt restructuring, which would mean private investors lose some of their money, but they would still need protection in the form of liquidity from other eurozone nations.
Angela Merkel wants to string out the decision on the stability fund until at least March. But Barroso is pressing for more haste:
"We in the commission are doing everything to give a sense of urgency," Barroso said. "To show that this crisis is also an opportunity for doing what sometimes was postponed in the past."
Once more, this EU summit is likely to be about presenting proposals, rather than about making decisions.
Author: Bernd Riegert / jli
Editor: Andreas Illmer