German Chancellor Angela Merkel speaks during the Jan. 25 opening of the Annual Meeting 2012 of the World Economic Forum in Davos, Switzerland.
German Chancellor Angela Merkel speaks during the Jan. 25 opening of the Annual Meeting 2012 of the World Economic Forum in Davos, Switzerland. REUTERS/Christian Hartmann

Chancellor Angela Merkel tried to deflect growing international pressure on Germany to agree an increase in the Eurozone's bailout funds Sunday by saying talks were continuing.

Amid calls to raise the size of the permanent European Stability Mechanism (ESM) ahead of a European Union summit Monday, Merkel was asked by the Bild am Sonntag newspaper about rising pressure on Germany to massively increase the bailout fund.

But the chancellor did not address the issue of whether Germany would back raising the ESM and instead answered a question about what impact increasing the ESM might have on the German budget this year.

The negotiations are continuing on whether we'll pay in our contribution in one tranche or two tranches, said Merkel, who has resisted calls for Germany to back increasing the bailout funds in part due to opposition in her center-right coalition.

But independent of all that, our deficit level as far as the European Stability Pact is concerned will not be increased as a result because the money won't be gone. It's only to be transferred from the federal budget to the ESM.

Merkel is keen to avoid the EU summit being sidetracked by debate about whether extra funding should be funneled into the Eurozone bailout funds, as the International Monetary Fund and some euro states -- including Italy and Spain -- have suggested.

A close Merkel ally in parliament, Peter Altmaier, said it made sense to first gauge the effectiveness of the ESM. It would be good if we make good use of the amounts that are now available, Altmaier, a senior MP, told German radio.

Austrian Chancellor Werner Faymann said in an interview in Der Spiegel newsmagazine he believed the 500 billion euro ESM firewall may need to be raised, echoing appeals made in Berlin by IMF Managing Director Christine Lagarde and Italian Prime Minister Mario Monti.

I wouldn't promise my parliament that 500 billion euros will be enough, Faymann said, adding his government was preparing to contribute to a higher firewall by taking funds from the European Financial Stability Facility (EFSF).

This is the direction it should go -- that way, we'd come up with a total of about 750 billion euros, he said. Financial markets are observing us closely and measuring how strong we are by looking at the size of the firewall. If it's too low, we'll be giving the markets a reason to speculate against us.

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

The German government believes that there should not be any discussions about increasing the firewall until March.

The leader of Germany's center-left opposition in parliament, Frank-Walter Steinmeier, said Merkel was making a mistake by resisting calls to raise the ESM.

You can argue whether continually coming up with new bailout funds is the right way to go, Steinmeier told the Welt am Sonntag newspaper. But for those who decide in a situation like this to set up a permanent bailout fund, they should realize that this one is definitely not big enough.

Steinmeier, foreign minister under Merkel in the 2005-2009 grand coalition and a possible challenger in 2013, said that Merkel had failed to inspire public confidence during Europe's worst postwar crisis, by repeatedly changing course.

She has annoyed a lot of people and put them off on Europe by continuously changing direction, said Steinmeier. As Europe's strongest export nation we have a fundamental interest in preventing this crisis from becoming a permanent recession for all of Europe, he added. If Europe isn't doing well, then Germany won't be doing well, either.

(Additional reporting by Andreas Rinke; Editing by Sophie Walker)