Running out of time

Investors across the globe are suspicious of the rescue fund: as it stands, the European Financial Stability Facility (EFSF) is not big enough, even with increased leverage. Finance ministers of the 17 euro-zone nations on Tuesday acknowledged that there are simply not enough funds to guarantee the liquidity of countries like Italy or Spain - and given overly nervous markets, they have turned to the IMF for more help in keeping the eurozone together.

"The EFSF alone will not be able to solve all those problems, we have to do it with the IMF and the European Central Bank," said Luxembourg's Finance Minister Luc Frieden. He said that what is happening in Europe is of interest to other nations, too. The IMF is the body in which "Russia, China, the US and Europe and others come together, and that is why there should be a common solution."

Reportedly, Italy and the IMF are already negotiating a credit line of 400 billion euros ($532.5 billion) - the country's funding needs over the next 12 months - to uncouple Italy from private capital markets.

Radical measures

The US, Europe and the large emerging markets are the major shareholders in the IMF - which, according to the plans of the eurozone finance ministers, would borrow money from the European Central Bank (ECB) which it could then lend to needy eurozone states. That way, the ECB would avoid directly financing those states. That's something which is not currently allowed under European treaties, and Germany is strongly opposed to the idea, but eurozone finance ministers agree it is time for radical change, and have initiated talks with the ECB. "The ECB is an independent institution, so we will put some proposals on the table, and after that it is for the ECB to take the decision," Belgian Finance Minister Didier Reynders said.

ECB must print money

The head of the ECB, Mario Draghi, doesn't have many options.

If he sits back and does nothing, the entire currency union could conceivably collapse because financial markets would no longer underwrite government bonds from Europe. If the ECB continues to buy bonds from Spain, Italy and Greece, it may soon have to print money. So far the ECB has managed to buy state bonds without having to increase the money supply. But with roughly 200 billion euros in nonmarketable funds on its books, the ECB has exhausted that possibility.

On Tuesday, the ECB failed to fully offset eurozone government bond purchases - but the bank needs these funds on a weekly basis to "sterilize" its bond purchases. Should the trend continue, the ECB will soon be forced to create massive amounts of fresh money if it wants to continue to buy bonds. The ECB will also have to print money if it provides loans to the IMF.

Separate fiscal union?

If Germany doesn't want to block the eurozone ministers' plan to involve the IMF in the rescue scheme, Chancellor Angela Merkel and Bundesbank President Jens Weidmann will have to mitigate or give up their opposition to a more active role for the ECB, and they will have to do so before the EU summit on December 9.

Should Germany give in, Berlin would expect the EU to get the right to intervene in the budgets of struggling states. That in turn would entail changing European treaties.

As that is a time-consuming process, Germany and France have been pondering the creation of a temporary fiscal union which would cover only the 17 countries using the euro common currency and which would be integrated into the EU treaties at a later stage. At least, that's what newspapers are reporting, although the German government is denying it.

Timetable for new rescue efforts

French President Nicolas Sarkozy, worried by the growing risk of a credit rating downgrade and budget problems, is scheduled to present his ideas for EU treaty changes on Thursday.

Treaty changes require unanimous support: on Friday, Sarkozy meets with British Prime Minister David Cameron in Paris to discuss the future of the eurozone and the European treaties. While the British leader is in favor of a wider role for the ECB, he is opposed to the fiscal union with its restricted membership. On Monday, interim Italian Prime Minister Mario Monti is expected to set out his debt-cutting measures in Rome.

Chancellor Merkel and President Sarkozy meet at a party convention of centre-right EU leaders in Marseille. They are expected to present a joint plan on treaty changes and a fiscal union that same day.

Time is short

EU leaders gather in Brussels on the evening of December 8 for a working dinner prior to Friday's summit, which, finally, will focus on new rules to tighten fiscal integration. The head of the IMF, Christine Lagarde, is also expected to take part in some of the meetings.

Britain's Financial Times newspaper on Wednesday reported that large companies in the EU are already preparing for a possible end to the currency union and the exit of one or several states from the eurozone.

That does not come as a surprise, as both Merkel and Sarkozy last month raised the possibility of Greek withdrawal from the eurozone, if that was needed to rescue the union as a whole.

Author: Bernd Riegert / db
Editor: Michael Lawton