Ms Merkel suggested lifting the capacity of the eurozone's bailout facilities to €700 billion ($929 billion) from €500 billion until next year. Germany had for months opposed any increase at all, but Ms Merkel's proposal is still a far cry from the nearly €1 trillion fund proposed by the European Commission.
Under Ms Merkel's proposal, the eurozone's temporary bailout fund would operate alongside a permanent, €500 billion facility until mid-2013. The permanent fund, which becomes effective in July, was originally supposed to absorb the €200 billion in loans to Greece, Portugal and Ireland that the temporary fund has already made. Yet that would leave the permanent fund, the European Stability Mechanism, with a remaining capacity of just €300 billion, which wouldn't be enough to rescue Spain and Italy, the two countries viewed as the most likely bailout candidates should the crisis spread further.
"We are saying that the ESM should permanently have €500 billion", Ms Merkel said. "The [temporary fund] will expire in the middle of next year as planned. But about €200 billion has already been awarded and we can imagine that this €200 billion [in loans] could run parallel to the ESM until it has been paid back by the programme countries."
In a paper drafted by the European Commission that describes the three main firewall models being discussed ahead of the Copenhagen meeting, the minimalist option endorsed by Ms Merkel is deemed the least effective approach.
"This option could be viewed as maintaining the status quo, which both G20 partners and the markets consider as inadequate", the paper says. "In that context, this option is likely to fall short of providing the necessary credibility to unlock an increase in IMF resources."
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