Germany Rejects Bigger Bailout

WSJ: BERLIN—Germany rejected calls for boosting the size of the planned euro-zone bailout fund, even as talks on restructuring Greek debt stalled over the weekend and raised the specter of a possible Greek default.

European demands to ensure that the European Stability Mechanism, the permanent bailout fund that is expected to be launched in July, has sufficient firepower to stop the spread of financial contagion in the event of a Greek default is likely to dominate a series of talks this week between Chancellor Angela Merkel and European leaders and international officials. Italian Prime Minister Mario Monti has demanded that Germany do more to finance the euro-zone rescue. Now, according to an unconfirmed report in the German weekly magazine Der Spiegel, Mr. Monti and European Central Bank President Mario Draghi are calling for doubling the volume of the ESM to €1 trillion ($1.293 trillion) from the planned €500 billion.
German Finance Minister Wolfgang Schäuble, speaking on German television Sunday evening, rejected the demands to boost the ESM, saying Europe must first implement the decisions made at the December summit of leaders before coming up with fresh demands for more cash.

"We will stick to the agreement reached by the leaders in December and then see again in March if that is sufficient," said Mr. Schäuble, speaking a day before a meeting of European finance ministers and central bank chiefs to prepare the Jan. 30 summit of EU leaders.

Ms. Merkel will likely be faced with similar demands during bilateral talks this week that kicked off Sunday evening with a dinner meeting with Christine Lagarde, managing director of the International Monetary Fund. Their meeting took place as talks in Greece over restructuring Greek debt appear at a logjam, making a Greek default more likely and barring the disbursement of international aid for Athens.

"Greece will certainly be on the agenda," said a person close to Ms. Merkel ahead of Sunday's talks.

Germany and the IMF have been pushing to increase the amount of debt written down in a Greek restructuring through a swap of old Greek bonds for new. But as those talks drag on, concerns are growing that the ESM won't be powerful enough to deal with the shock of a Greek default. An alternative to dramatically increasing the size of the ESM is to strengthen the IMF to allow it to play a bigger role in setting up firewalls in Europe. In December, EU leaders agreed to boost IMF resources by €200 billion. But little progress has been made over the past few weeks to turn that promise into hard cash.

The lack of an alternative to a more muscular ESM has prompted European leaders such as Mr. Monti to urge Berlin to do more to finance the euro-zone rescue. Responding to the comments during a news conference with the Bulgarian Prime Minister Boyko Borissov last week, Ms. Merkel quipped: "I'm still looking for what more we should do."

Mr. Schäuble came to Ms. Merkel's defense in the German television interview, saying Germany was bearing a heavy burden.

"We have to solve the problems and these problems did not originate in Germany," he said. "We are doing more than any other country."

Demands for a bigger bailout fund and economic stimulus to help beleaguered euro-zone economies get back on their feet also find some supporters in Germany. Opposition politicians, such as Thomas Oppermann, a leading Social Democrat, fear that Ms. Merkel's insistence on austerity could backfire, handicapping countries on the euro-zone periphery and costing more in the end.

"The weak countries in Europe must be strengthened economically, " Mr. Oppermann said Sunday. "This is also in Germany's interest."

Nevertheless, demands on German largess are likely to increase as European leaders work out the details of the ESM treaty. That will likely mean that as the caravan of European leaders passes through Berlin ahead of the European summit, Ms. Merkel will hear more calls for German generosity.

After her meeting with Ms. Lagarde on Sunday, Ms. Merkel will hold talks Monday with Belgian Premier Elio Di Rupo, European Commission President José Manuel Barroso, and European Council President Hermann Van Rompuy. On Thursday, she meets Spanish Prime Minister Mariano Rajoy.

Talks this week will also focus on the so-called fiscal compact, agreed by EU leaders in December. The pact calls for German-style debt brakes to limit borrowing, tough budget discipline, and to empower the European Commission to take countries that violate the debt and deficit rules of the European monetary union before the European Court. EU leaders who feel that they must be allowed to spend more to offset weak economic growth have called for a so-called escape hatch that would allow signatories to the pact to run higher deficits in vaguely defined special circumstances.

German officials warn against a weak pact, saying it would further erode investor confidence in Europe.

"The most important thing now is to implement what the leaders decided in December," said Mr. Schäuble.