Rescue Fund Divides Euro Zone

Spain hopes for stronger fund, German bank chief nixes notion

While Spain’s Prime Minister Jose Luis Rodriguez Zapatero talked up his country’s progress in getting its debt under control, he also expressed faith that the euro zone would agree to take steps to strengthen the European Financial Stability Facility (EFSF), the euro zone’s rescue fund.

However, Reuters reported that Axel Weber, outgoing head of the Bundesbank and a member of the governing council of the European Central Bank (ECB), said in a Tuesday column that ran in the Financial Times that there was no need to shore up the fund because steps already taken were adequate.

The difference of opinion has been running for a while, and while both Weber and Germany have frequently expressed their opposition, Weber, no longer a candidate for head of the ECB, may not carry the clout he formerly did.

The 17 euro zone leaders will be meeting on March 11 in Brussels to discuss the EFSF, among other issues, and Zapatero expressed confidence that Angela Merkel, Germany’s chancellor, would support a move to increase the effective amount of the fund from its current 250 billion euros ($341.826 billion) to the full amount of 440 billion euros. That would take special measures because of the way the fund is constructed. Currently the nominal amount of the fund is 440 billion euros, but because of reserve requirements it cannot lend that much to countries in need. This has led to concerns that if Spain requires a bailout, the rescue fund might be unequal to the job—particularly if Portugal asks for aid first.

Zapatero said in the report, “I am confident, confident in the capacity and commitment of Chancellor Merkel. We know this is a very intense electoral year in Germany, but I am confident.”

However, Weber wrote that current rescue measures had gone far enough and no additional action was necessary. "Against this backdrop, the existing instruments for short-term crisis resolution are adequate and, despite repeated demands to the contrary, should not undergo significant adjustment," he wrote.

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