By Jan Strupczewski and Daniel Flynn
February 25, 2012 6:12 AM EST
Leaders in the euro zone may not be able to meet international demands to bolster their own funds for bailing out the bloc's debtors when they meet next week because Germany is showing no sign of dropping its opposition to the plan, officials in the euro zone said.
A bigger European fund is a condition for major non-European economies before they lend more money to the International Monetary Fund to provide an even bigger wall of cash to fight the crisis that has already claimed three debtor countries in the euro zone and now threatens the much bigger economies of Italy and Spain.
"I would not bet on a positive outcome by the end of the March 1-2 summit," said one official in the euro zone. "German opposition to a deal is still very strong."
Leaders in the euro zone are set to review the 500 billion euro ($675 billion) limit on the joint lending capacity of their temporary and permanent bailout funds -- the European Financial Stability Facility and the European Stability Mechanism, respectively -- at the summit.
If they decide to merge the funds, they would create a firewall of 750 billion euros, which would help convince markets that they were committed to bringing the crisis under control.
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The European Central Bank supports such an increase, as do policy makers around the world who are considering more than doubling the IMF's resources by $600 billion.
"Everybody says there is a precondition that Europe makes more efforts first," South Korea's central-bank governor Kim Choong-soo said before a meeting of finance ministers and central bankers in the Group of 20 countries in Mexico City.
But Germany, the euro zone's biggest economy, insists Europe's current bailout arrangements are more than sufficient and that increasing them would send a signal to markets that the euro zone itself expects more trouble ahead.
German officials say countries would lose the impetus to carry out badly needed belt-tightening reforms. "It makes no sense, and is rather harmful," said one German official.
Others in Berlin argue the extra obligations under the combined bailout funds could increase the risk of further credit-rating downgrades for some countries in the euro zone. And the sense of urgency is dissipating because Italy and Spain are paying less to borrow on markets.
Officials from other countries warn that this argument is premature.
"The current improvement in markets is very fragile, so we need to be careful [to] not become complacent," said a second official in the euro zone. "Most euro zone countries are ready to move now, but I am afraid that Germany will need more time to agree to the increase, mainly to be able to better manage the Bundestag," the official said.
The country's parliament is due to vote on Monday on the agreement to provide Greece with a new financial lifeline, agreed this month despite much opposition from German taxpayers.
A draft set of conclusions prepared ahead of next week's summit showed that leaders in the euro zone will call for an international deal to increase IMF resources in April, implying a deal within the euro zone on its bailout funds in March. Yet this was unlikely to come as soon as next week, officials said.
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