The world’s business and political elite looked to German Chancellor Angela Merkel to lift their spirits at the annual Davos meeting Wednesday as Germany again confounded the sense of doom enveloping the eurozone.
Despite a looming recession in much of Europe and the recent downgrades of France and other eurozone partners, fresh data showed that business confidence in Germany rose for the third month in a row in January.
The Ifo economic institute’s closely watched business sentiment index beat analysts’ expectations to rise to 108.3 points in January from 107.3 points in December.
Merkel was due to flesh out her recipe to counter the crisis in her keynote speech at the World Economic Forum later Wednesday, when delegates will be hoping that she can offer a ray of light.
Pressure is mounting on Europe to get its house in order as the International Monetary Fund warned that world economic growth projected to reach 3.3 percent in 2012, could be slashed by more than half if the debt crisis persists.
Germany’s EU partners and International Monetary Fund have been calling on Europe’s biggest economy to boost bailout rescue funds, but while reports emerged that Berlin would agree on condition of stricter discipline from others, it has so far not confirmed the action.
The debate is gaining momentum ahead of a planned decision by EU leaders at a March 1-2 summit, by which time a treaty establishing the permanent European Stability Mechanism (ESM) is due to be signed.
The temporary European Financial Stability Fund (EFSF) still has about 250 billion euros ($325 billion) in its coffers, and it still has a year to run after the entry date for its ESM replacement was brought forward by leaders.
But International Monetary Fund managing director Christine Lagarde, a former French finance minister who met with Merkel this week in Berlin, has led calls for the two sums to be added together.
The overall rescue funding capacity should be “improved,” effectively putting into one basket “the EFSF and the ESM,” she told German public radio, a call she reiterated Wednesday in an interview with French radio Europe 1.
Bigger rescue funds looked urgent as talks between private creditors and Greece remained deadlocked, with bankers holding their line at taking a maximum loss of 50 percent on bonds, which would wipe about 100 billion euros off Greek debt.
Critics have said that would not be enough to stabilise Greek finances however, and that the EU and IMF will be forced to make up the difference.
The IMF is pressuring the European Central Bank to also forego potential profits on the 40 billion euros of Greek bonds it holds, according to the Financial Times, quoting unnamed European officials.
Having bought Greek bonds at substantial discounts, the ECB could book a handsome profit if Greece does not default and the bonds are held to maturity.
Meanwhile, European finance ministers turned to Spain for greater fiscal discipline, as it emerged that the country’s 2011 deficit was set to hit 8.0 percent of gross domestic product, above an agreed 6.0 percent limit, making its 2012 target of 4.4 percent look increasingly unattainable.
Economic affairs commissioner Olli Rehn said it was “essential” that Spain met the 2012 public deficit target already agreed with EU partners to ensure that debt sustainability was restored “without delay.” Spanish Prime Minister Mariano Rajoy’s new right-leaning government has announced tax increases and spending cuts but Rehn pressed Madrid for details on how it would balance its budget.