Europeans agree to review size of bailout fund

G20 finance ministers have won a commitment from the European Union to reassess the strength of its planned bailout fund, in a step that will heap pressure on Germany to overcome its resistance to putting up more money.

The size of the fund would be “essential input” when G20 nations consider providing more resources to the International Monetary Fund (IMF) to assist the region, finance ministers and central bankers from leading economies said in their final communiqué after two days of meetings in Mexico City, Reuters reported.

“There is broad agreement that the IMF cannot substitute for the absence of a stronger European firewall and the IMF cannot move forward without more clarity on Europe’s own plans,” US Treasury Secretary Timothy Geithner said.

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There are concerns that the euro zone’s permanent bailout fund of $673 billion, set up earlier this month, is not deep enough to rescue a heavily indebted state.

G20 finance ministers’ decision at the Mexico City summit to reject pleas for help pending an increase in the fund’s size places the onus firmly on Germany, the biggest national contributor to rescue packages, to soften its opposition to a higher firewall.

The government of Chancellor Angela Merkel must decide next month whether it will support plans to combine bailout funds to create a possible rescue fund of $1 trillion, Bloomberg reports.

EU leaders will convene for a two-day summit in Brussels on March 1, through European Commission President Jose Barroso said on Monday that a decision on expanding the firewall is unlikely to be reached until later in March.

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German officials say that a bigger bailout fund might make it harder for politicians in the most indebted countries to pass painful but necessary austerity measures through parliament, and that measures already taken in the 17-nation currency bloc have staved off a potential collapse of confidence, according to The New York Times.

On the eve of the G20 meeting, German finance minister Wolfgang Schauble wrote in the Mexican newspaper El Universal that he strongly opposed increasing the size of the rescue fund:

“Should we increase even more the firewalls? The response is a resounding no,” he said.

However, following the summit Schauble softened his position, saying that euro zone leaders would examine the matter and make a decision as early as next month, the BBC reported.

The euro zone debt crisis has dragged growth down in the region. Two of the bloc’s biggest economies – Italy and the Netherlands – fell into recession in the final three months of last year, shrinking by 0.7 percent in the final quarter, while Germany experienced its first negative growth since 2009, with GDP dropping 0.2 percent.

There are serious concerns that if the debt crisis is not tackled and solved in time global economic growth may suffer, due to falling consumer demand in the euro zone which would hurt Asia’s export-dependent economies. 

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