Without the larger firewall, many economists have said, the bailout funds might not be enough to stave off a crisis if a large country like Spain or Italy needed assistance.
But the deal fell short of what the International Monetary Fund and other international organizations had called for in recent days, and it remained unclear whether it would be enough to convince the IMF to increase its European commitments. The European ministers were held back from raising the amount of bailout funds even higher by countries such as Germany, whose electorates have balked at giving more money to the effort.
“The stability and integrity of the Economic and Monetary Union have required swift and vigorous measures,” the finance ministers of the 17 countries that use the euro said in a statement. “Robust firewalls have been established.”
In a sign that the ministers want to bump up confidence in their firewall as much as possible, they included in their total $136 billion that had already been extended to struggling countries. And they converted their figures from euros to dollars so that the total funds would essentially reach the psychologically important trillion mark, since Germany had resisted committing more to the fund.
“Germany couldn’t have gotten approval from parliament to do anything more,” said Christoph Weil, an analyst at Commerzbank. “But for the moment, I think the volume of the loans are enough. We can save Italy and Spain for the next few years.”
The new, permanent bailout fund will be called the European Stability Mechanism and will start operations in July, months earlier than had been planned. Its capacity will be capped at $667 billion. The additional $267 billion from the temporary European Financial Stability Facility will be available until it goes offline in mid-2013.
The finance ministers said they would contribute an additional $200 billion to the IMF to reassure other major IMF donors that Europe is willing to spend more to fix its own problems.
But the money committed to the funds remains well below the level that the IMF had requested. It also doesn’t come close to matching the $1.3 trillion mark that the head of the Organization for Economic Cooperation and Development, Angel Gurria, said this week was necessary to fend off worries about Spain and Italy.
Proponents of bigger bailout funds have argued that raising the money totals is the best way to avoid actually spending what they had committed. Having an overwhelming amount of money at the ready, they say, would persuade investors that struggling euro-zone countries are a safe bet for loans, thus keeping borrowing costs at sustainable levels and avoiding actual bailouts.
“It was as far as the German government was willing to go, and it was the minimum most other euro-zone countries were expecting,” Carsten Brzeski, a senior economist at ING Bank, said in a research note.
German Chancellor Angela Merkel has struggled to convince her parliament that more money is needed to fix Europe’s economic troubles. Earlier this week she relented on allowing the two bailout funds to run at the same time, but leaders of the nation’s opposition Social Democrats have said that they would protest a decision to commit any more German money to the efforts.
Borrowing costs for financially weak countries like Spain and Italy have fallen since their heights last fall, and the immediate edge of the crisis has eased since Greece wrote off more than half its debt earlier this month and was promised a second bailout.
But Spain is struggling to balance European demands for austerity with its concerns that spending cuts were deepening its recession and pushing up its 23 percent unemployment rate. Spanish Prime Minister Mariano Rajoy announced this month that he would reduce his country’s budget deficit far less than what had been previously pledged this year.
But even with the new deficit goal of 5.3 percent of gross domestic product, from a current deficit of 8.5 percent, sharp spending cuts are needed. On Friday, the Spanish government unveiled plans to cut government spending by $23 billion this year, raise corporate taxes and crack down on tax evasion.
“We are in a critical situation that has forced us to respond with the most austere budget of the Spanish democracy,” Spanish Budget Minister Cristobal Montoro said Friday in Madrid, Bloomberg News reported.