An argument over whether to increase the firepower of the eurozone's rescue funds will come to a head when the leaders of the European Union's member states meet in Brussels next week.
Although they agreed this week on a €130 billion bail-out for Greece, the 17 countries of the eurozone are still at odds over whether the rescue capacity should now be expanded, with Germany holding out against the idea of raising the lending limit of the European Stability Mechanism (ESM) above the current €500 billion.
The German government, fearing criticism from its electorate, is resisting any plan to give more money to the eurozone's struggling economies.
Most of the other eurozone member states and the European Commission are pushing for the fund to be enlarged in order to send a message of confidence to financial markets and insulate Italy and Spain against contagion.
Christine Lagarde, the managing director of the International Monetary Fund (IMF), has increased the pressure to enlarge the eurozone's lending capacity. She hinted last week that such a move was a pre-condition for a significant IMF contribution to the bail-out for Greece that was approved on Tuesday morning (21 February).
The IMF's executive board is to decide in the second week of March on what contribution it will make to that bail-out, but Lagarde said that it was vital that the eurozone first strengthened the firewall around the area's largest economies.
The ESM will be able to recapitalise banks, buy government bonds and give credit to struggling eurozone economies.
Olli Rehn, the European commissioner for economic and monetary affairs and the euro, said on Tuesday that he hoped leaders would agree to raise the lending capacity by allowing the €500bn ESM, which is to come into operation in July, to run in parallel with the ‘temporary' European Financial Stability Facility (EFSF), which still has about €250bn in its coffers.
However, a German government official told European Voice that Germany would hold out against such a move, just as it had done at the EU summit on 1-2 December, when eurozone leaders put off making a decision.
“We don't think it will be necessary,” the German official said. “You just need to look at the markets to see that it's not strikingly necessary.”
He said that there should be no connection between the IMF's contribution to Greece's bail-out and the longer-term protection that a larger lending capacity might afford.
“The size of the firewall is more about insulating those countries that are not in a [bail-out] programme. Objectively, I don't see that there is a link,” he said.
Lagarde participated in this week's final negotiations on Greece's bail-out, but it is unlikely that the IMF will contribute as much as it did to previous eurozone rescues.
Under pressure from the United States and the world's emerging economies, the IMF is trying to scale back its own financial commitment to the eurozone.
The IMF contributed a third of the money to Greece's first rescue in May 2010, and to the subsequent bail-outs of Portugal and Ireland, but it is unlikely to lend more than a tenth this time around.
“The Eurogroup expects a ‘significant contribution' but ‘significant' means lots of things,” Lagarde said on Tuesday.
An agreement on an expansion of the eurozone's rescue fund has also become a condition of plans to increase the amount of money that the IMF itself can lend.
The IMF's non-eurozone members want the eurozone to use more of its own money before they channel any further cash to the international lender. Eurozone member states have already pledged an additional €150bn in contributions, but this has not been sufficient to persuade other countries to follow suit.
Finance ministers and central bank chiefs from the G20 group of the leading industrial and developing economies are scheduled to discuss expansion of the IMF's lending capacity at a meeting in Mexico City on Saturday and Sunday (25-26 February), but an agreement is unlikely before eurozone member states approve the enlargement of their own fund.
