The European Commission (EC) has recommended to increase the size of the euro zoneâ€™s rescue funds from 500 to 940 billion euros.
The recommendation by the EC also includes two other scenarios; raise funds only temporarily to either 940 billion euros or 700 billion euros before reducing again to 500 billion euros.
For a permanent increase, resources from other G20 countries would most likely be required. Therefore, the EU leaders would need to focus more on efforts to persuade non-euro zone countries to increase commitments to the International Monetary Fund.
The ECâ€™s preference would be to take the unused guarantees in the existing bailout fund (EFSF) and move them into the new European Stability Mechanism (ESM). This would raise the ceiling initially to 940 billion euros. However, when the 200 billion euros committed to Greece, Ireland and Portugal would be used by the end of bailout programmes, the long-term size of the ESM would drop to 740 billion euros.
The next option would be to run the two funds side by side until the existing fund, the European Financial Stability Facility (EFSF), expires in the middle of 2013. This plan would temporarily increase the overall financial firewall to 940 billion euros but only for a year.
The third option would be to discontinue the EFSF but allow the three bailouts to continue outside the ESM, giving the ESM its full 500 billion euros capacity. Under current laws, the bailouts will be rolled into the ESM, lowering its lending capacity to about 300 billion euros over time.
Germany has so far resisted increasing the rescue system arguing that the recent state of financial markets indicates that raising the firewallâ€™s ceiling is no longer needed.
The question of increasing the size of the euro zoneâ€™s firewall will be discussed at the EUâ€™s finance ministers meeting in Copenhagen next week. The deadline for agreeing on this deal is at the end of this month.
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