An emergency summit of euro zone leaders last month agreed to let the fund, the European Financial Stability Facility, deploy its money in new ways to fight the crisis. But it did not take a major step for which investors were hoping: give the EFSF more firepower.
Since then, the euro zone's debt problem has become even more worrying, threatening to move beyond small countries such as Greece to engulf large states such as Spain and Italy.
The spread of the Italian 10-year government bond yield over German Bunds jumped to a euro-era high of 3.85 percentage points on Tuesday, a level which, if sustained over the long term, could prevent Italy from borrowing in the markets at affordable rates.
To convince the markets that this will not happen, rich euro zone governments may have no choice but to override opposition among their taxpayers and pledge to contribute to a drastic expansion of the EFSF -- perhaps doubling or tripling it.
"You need to convince the world that Europe is going to sort itself out," said John Fitzgerald of the Economic and Social Research Institute, a Dublin-based think tank.
"A way of saying that is to have the fund so large that it can handle anything that comes its way. It would stop speculation in Spain and Italy," said Fitzgerald, who sits on the board of the Irish central bank.
OPPOSITION
Since the euro zone summit on July 21, Europe's refusal to commit to expanding the EFSF has emerged as a key factor behind the meeting's failure to calm markets, along with slowing global economic growth and doubts that a rescue plan for Greece can cut the country's debt enough to avert a large-scale default.
Opposition to enlarging the EFSF at this time is strong in several key governments. German Chancellor Angela Merkel has not ruled it out, but agreeing to it could damage her support among disgruntled German voters; Berlin does not want to be sucked into pledging ever-growing sums to weak European states.
"Everybody is aware this is a no-go scenario for the Germans, so no one is putting that on the table really," said one euro zone policy maker, who declined to be named. Berlin's scepticism is shared by Finland, Slovakia and the Netherlands.
France has also been opposed, apparently because further commitments to the EFSF could strain the French government's finances. A senior French official played down any need to expand the EFSF, noting that most of it had not yet been tapped.
The mathematics of the EFSF are not reassuring the markets, however. Rough calculations suggest the EFSF, which borrows its funds from the markets backed by guarantees from euro zone states, might conceivably cope with a bailout of Spain but there would be little room for error, while it would not have enough ammunition if Italy needed help.
The EFSF shares the burden of Europe's contribution to bailing out Ireland and Portugal with the European Financial Stabilisation Mechanism, another emergency fund. It is already committed to providing 17.7 billion euros in emergency loans to Ireland and 26 billion to Portugal.In addition, the EFSF will take over the remainder of Europe's contribution to an initial bailout of Greece, which is likely to require 25 billion euros, and it is expected to provide two-thirds of a 109 billion euro second bailout of Greece announced last month.
Since then, the euro zone's debt problem has become even more worrying, threatening to move beyond small countries such as Greece to engulf large states such as Spain and Italy.
The spread of the Italian 10-year government bond yield over German Bunds jumped to a euro-era high of 3.85 percentage points on Tuesday, a level which, if sustained over the long term, could prevent Italy from borrowing in the markets at affordable rates.
To convince the markets that this will not happen, rich euro zone governments may have no choice but to override opposition among their taxpayers and pledge to contribute to a drastic expansion of the EFSF -- perhaps doubling or tripling it.
"You need to convince the world that Europe is going to sort itself out," said John Fitzgerald of the Economic and Social Research Institute, a Dublin-based think tank.
"A way of saying that is to have the fund so large that it can handle anything that comes its way. It would stop speculation in Spain and Italy," said Fitzgerald, who sits on the board of the Irish central bank.
OPPOSITION
Since the euro zone summit on July 21, Europe's refusal to commit to expanding the EFSF has emerged as a key factor behind the meeting's failure to calm markets, along with slowing global economic growth and doubts that a rescue plan for Greece can cut the country's debt enough to avert a large-scale default.
Opposition to enlarging the EFSF at this time is strong in several key governments. German Chancellor Angela Merkel has not ruled it out, but agreeing to it could damage her support among disgruntled German voters; Berlin does not want to be sucked into pledging ever-growing sums to weak European states.
"Everybody is aware this is a no-go scenario for the Germans, so no one is putting that on the table really," said one euro zone policy maker, who declined to be named. Berlin's scepticism is shared by Finland, Slovakia and the Netherlands.
France has also been opposed, apparently because further commitments to the EFSF could strain the French government's finances. A senior French official played down any need to expand the EFSF, noting that most of it had not yet been tapped.
The mathematics of the EFSF are not reassuring the markets, however. Rough calculations suggest the EFSF, which borrows its funds from the markets backed by guarantees from euro zone states, might conceivably cope with a bailout of Spain but there would be little room for error, while it would not have enough ammunition if Italy needed help.
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