Europe under pressure to boost rescue fund

Government debt purchases by the European Central Bank calmed markets toward the end of last week, pushing down the borrowing costs of vulnerable countries on the euro zone's southern periphery such as Portugal, Spain and Italy.

But ECB President Jean-Claude Trichet has made clear that politicians cannot rely solely on the Frankfurt-based central bank to resolve their crippling debt crisis and urged them to take decisive new steps to win back the confidence of investors.

He has suggested one solution could be to boost the size of the 750 billion euro ($1,006 billion) rescue facility the EU and IMF set up in May after bailing out Greece, an idea backed by Belgian Finance Minister Didier Reynders on Saturday.

Speaking at a conference in Brussels, Reynders said it made no sense to wait to increase the amount of available rescue funds until the bloc has set up a new permanent rescue mechanism that is scheduled to take effect in 2013.

If we decide (to increase it) in the next weeks or months, why not apply it immediately to the current facility, he said.

Europe's economic powerhouse Germany has said it sees no reason to increase the facility, but some of its euro zone partners believe such a move could alleviate market concerns about the bloc's ability to cope with further contagion.

Current rescue funds would be stretched if the bloc were forced to bail out Portugal and Spain, after agreeing to provide Ireland with 85 billion euros in emergency aid last week.

SPANISH BACKLASH

In a bid to ease market concerns about Spain's finances, the government of Prime Minister Jose Luis Rodriguez Zapatero announced a series of new measures last week, saying it would bring forward pension reforms, raise tobacco taxes and cut windpower subsidies.

But its plans to sell off 49 percent of state-owned airports authority AENA provoked a wildcat strike by air traffic controllers that paralyzed airports on Friday and Saturday, forcing the government to declare a state of emergency.

More than 90 percent of the controllers had returned to work by Saturday evening, but the disruption underscored the difficult balancing act euro zone governments face as they seek to appease markets without provoking a public backlash that could further dent investor confidence.

If they don't manage to get this situation under control it could be a serious blow for the government both at home and internationally, said Angel Laborda, an economist at Spanish consultancy FUNCAS.

A poll published in Spanish newspaper El Pais on Sunday showed support for Zapatero's ruling Socialists sinking to its lowest level in the country's modern democratic era.

In Greece, which is struggling to meet tough deficit reduction targets agreed in exchange for a 110 billion euro EU/IMF rescue, the central bank governor urged the government to step up the pace of reform, saying the country should be aiming to beat the goals set for it.

Fiscal adjustment cannot be continued successfully if it is not coupled with a radical revamp of the state and a structural modernization of the economy, Bank of Greece Governor George Provopoulos told the Kathimerini newspaper.

German Chancellor Angela Merkel, aware that German taxpayers are deeply opposed to financing more euro zone rescues, has also urged vulnerable countries on the so-called euro zone periphery to take new steps to restore the confidence of markets.

Her government has rejected calls by Spain and other governments to create a fiscal union in the euro zone and one of Merkel's key conservative allies reiterated at the weekend that Germany opposed the idea of issuing common euro zone bonds to reduce the borrowing costs of weaker euro states.

Each country needs to look out for itself first and foremost, Volker Kauder, parliamentary leader of Merkel's Christian Democrats, told Bild am Sonntag newspaper. Such euro bonds would quite simply be in breach of the constitution.

Merkel's spokesman was forced to deny on Saturday a report in British daily the Guardian that she had warned Germany might leave the euro during a heated exchange at a summit of EU leaders in late October.

(Reporting by Paul Day in Madrid, Justyna Pawlak in Brussels, Dave Graham in Berlin; Editing by Angus MacSwan)