March 14 (Bloomberg) -- Chancellor Angela Merkel’s Cabinet approved legislation to help set up the euro-area’s permanent rescue fund, as international pressure mounted on Germany to back plans to increase the capacity of Europe’s crisis backstop.
Ministers meeting in Berlin today backed a bill authorizing Germany to contribute to the permanent European Stability Mechanism. The legislation will now go to parliament for ratification by June 15 along with a companion bill on the European Union’s deficit-control treaty, the fiscal pact.
Germany, the biggest country contributor to euro-region rescues, is increasingly isolated as the main holdout against raising the 500 billion-euro ($652 billion) ceiling on bailout lending. Spanish Prime Minister Mariano Rajoy called today for a bigger financial backstop to protect nations like his from contagion.
“We need to advance in the design of the European firewall,” Rajoy told Parliament in Madrid. “Spain considers it to be of utmost importance to increase the limit as soon as possible and is working on that.”
Euro-area finance ministers meeting in Brussels two days ago asked the European Commission, which has backed the largest possible rescue pool, to propose options on the firewall for a decision at a March 30-31 meeting in Copenhagen.
“If there was a need, we could discuss whether to use the ESM in parallel for some time” with the temporary fund it is due to replace in July, “and so raise the volume,” Norbert Barthle, the ranking budget expert for Merkel’s Christian Democratic Union, said by phone today. “At the moment I have the impression that markets are calming down more and more and this need may not materialize.”
Led by the U.S., major world powers have held back on increasing the International Monetary Fund’s crisis-fighting resources until the 17-nation euro area provides more self-help in the form of a bolstered firewall.
Germany has been the main holdout against proposals to let the ESM tap the remaining 250 billion euros in the temporary fund, the European Financial Stability Facility. German Finance Minister Wolfgang Schaeuble said yesterday that there’s a “certain link” between the decision on the ESM to be taken by the end of March and a bigger role for the IMF.
“We’ve said that we want to take the final decision together in March,” Schaeuble told reporters in Brussels. At the same time, euro states must avoid “creating the wrong incentives that would prompt some to believe that they can get by without determination to solve their problems.”
Barthle said that he took part in a telephone conference with the Finance Ministry yesterday during which “it was made very clear that the agreed volume of the ESM is to remain unchanged at least until the end of March, when the final assessment of whether the volume is enough has been completed.”
Prime Minister Mario Monti, speaking after talks with Merkel in Rome late yesterday, reiterated Italy’s support for “adequate” financial firewalls. Merkel, asked about boosting the region’s crisis-fighting war chest, declined to comment. She instead stressed the need to act now to bolster growth and competitiveness and press ahead with economic reform.
“We’ve come a good way along the mountain path, but we’re not completely over the mountain,” Merkel said. “I suspect that in the next few years there will continue to be new mountains -- there won’t be a celebratory event in which we say we’re over the mountain and now we can sit among the trees and say that we’ve done it.”
Merkel praised Monti’s “bold” efforts since taking office on Nov. 16 to overhaul Italy’s economy, which include 20 billion euros in austerity measures and steps to deregulate services amid surging Italian bond yields that had threatened to break up the currency region. Aided by European Central Bank liquidity measures, Italian 10-year borrowing costs have fallen to 4.89 percent from a euro-era record of 7.26 percent on Nov. 25.
Even so, Merkel said that “huge risks” lie ahead. “We have these imbalances -- what we’re referring to as the Target2 balances -- they are one of many indicators that we’re not back in full balance,” she said.
Monti, a former European Union competition commissioner, said Italy has “arrested” the crisis though not yet overcome it. “Italy still has homework to do,” he said. Italy prefers to rely on its “own strengths” rather than seek any external aid during the worst moments of the crisis.
Euro governments agreed March 2 to pay the first two annual installments into the permanent rescue fund this year and complete the capitalization in 2015, a year ahead of schedule.
Europe plans to equip the ESM with 80 billion euros in cash and give it the right to call another 620 billion euros in an emergency. The total would enable it to lend 500 billion euros and maintain a buffer to garner an AAA credit rating when it is set up in July.
“We would like to see some combining of the resources,” French Finance Minister Francois Baroin said in Brussels. “We are confident we will see some advances in the next fortnight.”
To contact the reporter on this story: Rainer Buergin in Berlin at Rbuergin1@bloomberg.net
To contact the editor responsible for this story: James Hertling at firstname.lastname@example.org