When EU leaders signed the modified Treaty for Establishing the European Stability Mechanism (ESM) on February 2, 2012, they delayed a decision on one key provision: What to do with the unused funds from the EFSF, which the ESM effectively replaces. Officials have debated for months, and eurozone finance ministers meet next week to hash out an agreement.
The EFSF has been the eurozone's primary bailout facility since 2010, and in July 2011, officials enhanced it to provide capital support for troubled eurozone banks as well as sovereigns. Its total lending capacity is about €440 billion, and nearly €200 billion is spoken for by Greece, Portugal and Ireland, leaving €240 billion in the piggy bank. The ESM will be the eurozone's permanent bailout mechanism after mid-2012. It'll provide further support for bailed-out nations encountering difficulty returning to primary debt markets once their EFSF financing wraps, and it will be the primary lender to future troubled sovereigns. The ESM was scheduled to begin once the EFSF ends on June 30, 2013, but the February 2 agreement moved its birth a year earlier, leaving the EFSF's existence after July 1, 2012, in question. The ECB, European Commission and many heads of state favor adding the untapped €240 billion to the ESM—no sense taking approved funding off the table—but Germany opposed this.
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A German roadblock might seem odd considering Chancellor Merkel's historically pro-euro stance. But she's walking a tough political tightrope, balancing international needs with domestic political concerns. The eurozone's survival doesn't just depend on Germany's EFSF/ESM contributions—Merkel and French President Nicolas Sarkozy are widely seen as the eurozone's de-facto leaders, and her strong political support for the periphery has been key in corralling the rest of the union at times. However, her international stance is deeply unpopular with the many German taxpayers who don't enjoy their hard-earned euros bailing out what they see as their profligate neighbors.
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Thus, Merkel's steadfast euro support on the international stage has cost her at home, jeopardizing her 2013 re-election chances. By all accounts, Merkel supports doing what's necessary to preserve the euro, and she's signaled tepid support for boosting the ESM. But despite her stature as an international stateswoman, she's a politician first and foremost—her goal is to win next year. And she has a difficult road ahead.