Germany's Schaeuble back against euro zone firewall

BERLIN/PARIS Thu Feb 23, 2012 3:15pm GMT

Germany's Finance Minister Wolfgang Schaeuble holds a news conference after a Eurogroup meeting in Brussels February 21, 2012. REUTERS/Yves Herman

Germany's Finance Minister Wolfgang Schaeuble holds a news conference after a Eurogroup meeting in Brussels February 21, 2012.

Credit: Reuters/Yves Herman

BERLIN/PARIS (Reuters) - German Finance Minister Wolfgang Schaeuble is in for a torrid weekend in Mexico City.

Chancellor Angela Merkel is so concerned to get a second bailout for Greece approved by her parliamentary majority next Monday that she has hardened Berlin's stance against any increase in the euro zone's financial firewalls.

As a result, Schaeuble will face the combined forces of the International Monetary Fund, the United States, China, Japan and most of his European partners at a G20 finance ministers' meeting demanding that Europe does more to fight its sovereign debt crisis before they will offer an extra cent.

European Union leaders had hoped that after getting its way on a new fiscal discipline treaty, Germany would relent and agree at a March 1 summit to combine the firepower of Europe's existing temporary bailout fund and a planned permanent one.

That in turn could open the way for the IMF to increase its contingency fund for helping states hit by the crisis.

But Merkel's spokesman Steffen Seibert said on Wednesday: "The German government's position has not changed - that means no, it is not necessary."

"What was agreed with partners (in December) was that in March there would be an examination of the size," he said, adding that conditions on the bond markets for stressed euro zone states such as Italy and Spain had improved since then.

The European Commission has made clear it will recommend running the two rescue funds in parallel to provide stronger protection against the risk of financial contagion.

"The Commission's task is to speak the truth as we see it, and we see (a combined fund) is essential in order to overcome the crisis and return to recovery and growth," EU Economic and Monetary Affairs Commissioner Olli Rehn said on Thursday.

"I trust we will in due course come to this conclusion in the euro area and among the leaders of the euro area," he told Reuters in an interview.

Germany lost its main ally in the camp of hardline northern creditors on the issue when Dutch Finance Minister Jan Kees de Jager said in a newspaper interview on Wednesday that he now favored boosting the warchest.

"We are ready to combine the resources of the two funds at our disposal so that we have a firepower of 750 billion euros. We will see whether we can conclude by March," De Jager told French daily Le Monde.

"Put the question to Germany, which has been opposed since October with France. We have to have adequate resources to ensure financial stability."

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"PRETTY ISOLATED"

The French also favor a bigger rescue fund but have backed the Germans in public to avoid cornering Merkel, diplomats say.

"We're aware we're pretty isolated, but this has to be a unanimous decision," a senior German source said.

The United States, especially Treasury Secretary Timothy Geithner, has kept up a drumbeat of pressure, something Germans privately suggest they may be doing to put the onus on the Europeans to help President Barack Obama's re-election campaign.

Britain and key non-euro zone G20 members have signaled they will only respond to an IMF request for an extra 500 billion euros in contingency funds to cope with fallout from the European crisis if the euro zone does more to help itself.

German officials say they don't see the logic in linking the two, arguing that the euro zone is doing its homework, notably by sealing a second Greek bailout this week, and that increasing the firewall does not create credibility.

"We've just drawn up a second Greek package and in other countries the situation has improved. We're doing our homework," said another German official. "Why are they making this linkage? It might be different if there was real evidence that the firewall is too small."

Germany's "nein," they say, is not categorical and would be reviewed if the crisis worsened or financing costs for countries such as Spain or Italy rose again.

A senior EU official said the Europeans needed to act before the IMF/World Bank spring meetings in Washington on April 20-22.

Some in Berlin privately say the political cost of raising the firewall could be too high.

"It doesn't help anyone to agree on something that isn't going to go through the Bundestag (lower house)," the senior German source said. "If you don't agree yourself, how can you possibly convince the Bundestag?"

Lawmakers in Merkel's centre-right coalition say they expect a substantial backbench revolt against the Greek bailout in Monday's vote, although previous rebellions have fallen short of depriving her of a majority in her own camp.

The opposition Social Democrats and Greens support the bailout so its passage is not in doubt, but it would be a severe embarrassment for Merkel if she lost what Germans call her "chancellor majority" on the issue.

G20 president Mexico has made clear the Europeans need to show they will raise their firewall to unlock more IMF support.

"We know that this is on the agenda for discussion in March, so we will be hoping for some progress in this direction," Mexican central bank chief Augustin Carstens told Reuters in an interview, when asked what kind of reassurances G20 countries would like to see from Europe at the meeting.

"Once this has happened, I hope that discussions about the IMF can proceed with more fluidity."

G20 officials who spoke on condition of anonymity said Europe was prepared to make a signal on a stronger firewall on the understanding the final communique would then make a reference to boosting IMF aid to crisis victims.

That may have been counting without the Germans.

(Additional reporting by David Brunnstrom and Robin Emmott in Brussels, Krista Hughes in Mexico City; Writing by Paul Taylor; editing by Janet McBride)