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 €192 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 a little over €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.
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.
The UK Independent has more coverage of how increasing the bailout to €940 billion would word
Here's how the €940 billion plan would work: the temporary European Financial Stability Fund (EFSF), which has a €440bn (£388bn) lending capacity, is due to expire in June 2013. It is due to be replaced by a permanent European Stability Mechanism (ESM), with a lending capacity of €500bn, this summer. European leaders agreed to bring forward the establishment of the permanent fund last year in one of their many bids to calm the frenzied financial markets. So the new plan would be to keep the temporary fund in operation after this summer has passed and to run the two bailout pots in tandem. This would give the European bailout funds a combined firepower of €940bn.
That would then open the door for members of the International Monetary Fund (IMF) – who have made it clear that they will only increase their resources when the EU gets its own house in order – to boost the multilateral lender's lending power to €1trn. This would give investors the reassurance of total bailout resources to help prop up the eurozone of close to €2trn, unlocking confidence and investment.
So what's the obstacle? There are two. The first is politics. Germany, the country which is on the hook for the largest portion of both the bailout funds, has been resistant to the idea of running the two pots of money in parallel, because that would, inevitably, extend the scale of its own national guarantees to its southern European neighbours.
Berlin has, in fairness, given some ground on this. The German Chancellor, Angela Merkel, tested the water this weekend with a proposal for two funds to run in tandem only until the middle of next year. Ms Merkel is said to have calculated this is the maximum she could get past her parliament.
But it is not clear that such a time-limited plan would unlock the extra IMF resources. Other IMF members, particularly the US, might well judge that Europe is still not doing enough to warrant them increasing their own commitments to the multinational rescue fund.
That feeds in to the second obstacle: market credibility. A time limit on the tandem operation could be self-defeating. Many investors say they want to know that the eurozone, in co-operation with the IMF, has sufficient resources on hand to prevent member states the size of Spain and Italy from defaulting on their debts. The two countries between them make up more than 35 per cent of the eurozone bond market. The combined bailout fund would only just cover their financing needs over the coming years. Indeed, it might be too small. With €200bn committed from the EFSF to Greece, Ireland and Portugal, the true size of the combined funds would be €740bn rather than €940bn.
What should we expect from Copenhagen? Throughout this crisis, European leaders have done the minimum possible at every stage in the hope that it would prove enough. A combination of the two rescue funds is likely; a permanent bolstering of the eurozone's firewall is not.
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