Merkel walks fine line on boosting euro firewall

Tue Jan 24, 2012 2:45pm EST
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By Luke Baker and Noah Barkin

BRUSSELS/BERLIN (Reuters) - Angela Merkel's conservative allies warned on Tuesday against committing additional German funds to euro zone bailout schemes, underscoring how difficult it will be for the chancellor to meet international demands to boost the bloc's defenses.

International Monetary Fund chief Christine Lagarde and Italian premier Mario Monti have both travelled to Berlin to urge Merkel to increase the euro zone's firewall by either boosting the 500 billion-euro European Stability Mechanism (ESM) or allowing it to run concurrently with the existing bailout fund it is due to replace at mid-year.

German government sources have told Reuters Merkel does not rule out such a step if the euro zone crisis deteriorates over coming months. But only the threat of a disaster may persuade her coalition to back more funds for the currency bloc.

In particular, she faces stiff opposition from the Bavarian Christian Social Union (CSU), whose leaders have flirted with euroscepticism, and the liberal Free Democrats (FDP), whose freefall in opinion polls has thrown them onto the defensive.

"The (opposition) Social Democrats would back it and she could probably get her Christian Democrats on board. But the FDP could well see it as a no go," a senior German official told Reuters, requesting anonymity.

Euro zone finance ministers have agreed to "reassess the adequacy" of their current rescue fund - European Financial Stability Facility (EFSF) - and its successor, the ESM, in March.

And Germany is unlikely to send a clear signal about any shift in its position until then. But Lagarde sent Merkel a clear message at a meeting between the two on Sunday that G20 countries outside the euro zone would not agree to boost their contributions to the IMF unless the chancellor showed movement on the rescue funds, European sources told Reuters.

The IMF resources debate will be at the centre of talks between G20 finance ministers who are due to meet in Mexico next month.   Continued...