Merkel walks fine line on boosting euro firewall (Reuters)

BRUSSELS/BERLIN (Reuters) ? Angela Merkel's conservative allies warned on Tuesday against committing additional German funds to euro zone bailout schemes, underscoring how difficult it will be for the chancellor to meet international demands to boost the bloc's defenses.

International Monetary Fund chief Christine Lagarde and Italian premier Mario Monti have both travelled to Berlin to urge Merkel to increase the euro zone's firewall by either boosting the 500 billion-euro European Stability Mechanism (ESM) or allowing it to run concurrently with the existing bailout fund it is due to replace at mid-year.

German government sources have told Reuters Merkel does not rule out such a step if the euro zone crisis deteriorates over coming months. But only the threat of a disaster may persuade her coalition to back more funds for the currency bloc.

In particular, she faces stiff opposition from the Bavarian Christian Social Union (CSU), whose leaders have flirted with euroscepticism, and the liberal Free Democrats (FDP), whose freefall in opinion polls has thrown them onto the defensive.

"The (opposition) Social Democrats would back it and she could probably get her Christian Democrats on board. But the FDP could well see it as a no go," a senior German official told Reuters, requesting anonymity.

Euro zone finance ministers have agreed to "reassess the adequacy" of their current rescue fund - European Financial Stability Facility (EFSF) - and its successor, the ESM, in March.

And Germany is unlikely to send a clear signal about any shift in its position until then. But Lagarde sent Merkel a clear message at a meeting between the two on Sunday that G20 countries outside the euro zone would not agree to boost their contributions to the IMF unless the chancellor showed movement on the rescue funds, European sources told Reuters.

The IMF resources debate will be at the centre of talks between G20 finance ministers who are due to meet in Mexico next month.

PART OF IMF DEBATE

"The definitive conversation on this may not happen until March. But certainly the message is being sent about the need for the combined value of the EFSF/ESM to be increased (towards 750 billion euros) and Germany has taken that message on board," one euro zone source said.

"It's part of a wider discussion about boosting IMF resources, but it's also part of the need to get countries to sign up to the fiscal compact," the source added, referring to a treaty on tighter budget rules that Berlin supports. "The timing for Germany is everything, but they know where they need to go."

Officials close to Merkel denied that she had made any promises to Lagarde. But they also point to her comments at a news conference with Belgian Prime Minister Elio Di Rupo on Monday.

When asked if she could agree to boost the euro zone's rescue funds, she at first said it was not time for such a debate, before adding that Germany was prepared to do everything necessary to save the euro.

Another euro zone source said Germany had signaled it was ready to move on the firewall when the time was right, but acknowledged that Merkel had domestic constraints and a deal before an EU summit at the beginning of March was unlikely.

Lagarde said in a speech in Berlin on Monday that bigger countries like Italy and Spain could be pushed into a "solvency crisis" if European governments refuse to commit more funds.

Monti has complained to Merkel in person that bolder steps are needed from Germany to avoid destabilizing Italy and the broader single currency bloc.

But Otto Fricke, a budget expert from the FDP, told Reuters that boosting the firewall now would be "putting the cart before the horse".

Another senior member of the party said, on condition of anonymity, that the only scenario where Merkel might get support for a bigger ESM was in the event of a disorderly Greek default, which could unleash contagion engulfing both Italy and Spain.

Gerda Hasselfeldt, a leading MP from the CSU, said it was otherwise "superfluous" to hold such a debate now.

Senior government officials said they would find it hard to go back on the oft-repeated message to German voters that the combined potential outlay of the ESM and EFSF should not exceed 500 billion euros.

(Additional reporting by Stephen Brown, Andreas Rinke, Matthias Sobolewski and Erik Kirschbaum; Writing by Noah Barkin)

Source: http://us.rd.yahoo.com/dailynews/rss/eurobiz/*http%3A//news.yahoo.com/s/nm/20120124/bs_nm/us_eurozone_germany

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