By Gerrit Wiesmann in Berlin, Alex Barker in Brussels, and Kerin Hope in Athens
Germany is open to boosting the firepower of the eurozone?s rescue funds to 750bn euros in exchange for strict budget rules favoured by Berlin in a new fiscal compact for all members of the currency union.
Berlin appeared to soften its longstanding resistance to increasing the fund just hours after the International Monetary Fund warned that the eurozone needed more money to build ?a larger firewall? to prevent the crisis from spreading to its core economies.
According to German and eurozone officials, Angela Merkel is prepared to let the existing European Financial Stability Facility, which has about 250bn euros in unused funds, run in parallel with its successor, the 500bn-euro European Stability Mechanism, whose launch has been brought forward to July.
In return the German chancellor wants eurozone heads of government to sign up to rules for cutting budget deficits and public debt that are much tougher than those negotiated by eurozone governments.
The most recent version of the fiscal compact would allow governments to breach deficit limits in ?periods of economic downturn? – a phrase that was criticised by the ECBas an ?escape clause? that could lead to ?easy circumvention? of what are meant to be cast-iron rules.
The German offer emerged as Christine Lagarde, the IMF head who met
Ms Merkel on Sunday, pressed Berlin for ?a clear and credible timetable? to fold the existing EFSF into the ESM to increase its size.
Without a larger bail-out fund, fundamentally solvent countries such as Italy and Spain could be forced into a financing crisis, Ms Lagarde said in a speech in Berlin. ?This would have disastrous implications for systemic stability,? she said.
For Ms Merkel, increasing the fund risks a showdown with a restive parliament, which is sceptical of further exposing German taxpayers to the rescue effort. But she is now said to be willing to take that risk if she can put her stamp on the budget rules in the fiscal compact.
?We think we can get the ESM approved if we link it to solid new budget rules,? a German official said. One European official in turn said Germany was ?framing the debate? about budget rules with a possible trade-off on the size of the bail-out fund.
In Brussels, the size of Greece?s debt – and whether it was sustainable – was a central point of contention at a meeting of eurozone finance ministers. They were seeking to wrap up a negotiation with private bondholders that would force them to accept 50 per cent losses on the face value of their bonds.
Additional reporting by Hugh Carnegy in Paris and Alan Beattie in Washington
? The Financial Times Limited 2012