Germany softens resistance to eurozone ‘firewall’

Wolfgang Schauble at a press conference after the G20 meeting of fnance ministers and central bank governors

The German government has softened its resistance to increasing the eurozone’s “firewall” against financial-market contagion from the Greek crisis by signalling it would consider the combination of the region’s temporary rescue fund with its permanent successor.

Wolfgang Schäuble, finance minister, said using “the remaining funds” in the European Financial Stability Facility to bolster the European Stability Mechanism was “one possible solution to the question” of how to better guard against bond market sell-offs hitting Italy or Spain.

With this, Mr Schäuble broke with the German government’s official stance that there was “currently no need” to increase the size of the €500bn ESM – due to start life by mid-year – and that eurozone heads of government would discuss the issue only some time in March.

He was speaking after briefing the German parliament’s budget committee about a second, €130bn aid package for Greece, and just before setting off for the weekend meeting of G20 finance ministers in Mexico, where he is set to face questions about Germany’s resistance to bolstering the firewall.

Most of the eurozone’s 16 other members, the European Central Bank, and the International Monetary Fund have called for the firepower of the ESM to be increased – most easily by running the EFSF and the €250bn it has left after allocating resources for Greece, Ireland and Portugal in parallel.

They argue that a backstop of €750bn would be a powerful signal to bond-market investors and an important complement to the second Greek aid programme and the planned increase in IMF resources, which are both meant to be finalised over the coming weeks.

Berlin up until now rejected these arguments, but Mr Schäuble’s softening of this official line could put pressure on Angela Merkel, the chancellor, at the March 1-2 summit of EU leaders in Brussels, which senior European officials had once hoped could bring an agreement about a bigger firewall.

Senior lawmakers from Ms Merkel’s coalition of Christian Democrats and Free Democrats told the FT the chancellery had hoped to delay the fraught discussion about yet again increasing the eurozone’s firewall until after Monday’s Bundestag decision about the new Greek rescue deal.

Lawmakers said the government looked set to win a resounding majority for Germany’s part in the second programme for Athens, with the opposition Social Democrats and Greens likely to join the coalition parties in passing a request from the finance ministry.

The resolution will make German funding of the new programme conditional upon Greece implementing the immediate and longer-term policy measures it has signed up to, and the “successful” restructuring over the next few weeks of sovereign bonds held by private-sector investors.

Christian Democrats and Free Democrats were planning a separate resolution calling upon Ms Merkel to get the IMF to participate in the Greek deal. The fund has pledged but not yet formally approved a contribution of €13bn, in part because it would first like to see the eurozone agree a bigger firewall.

Mr Schäuble said he could “not with any certainty exclude” the possibility Greece’s new programme would fail like the first, raising the prospect of asking parliament for more money. He also said Greece might need a follow-on programme to reach its 2020 goals when the three-year programme ended.