Compare and contrast Franco-German positions on larger bailout fund

The WSJ noted earlier today that, barely 12 hours after the European Central Bank signalled it was prepared to wade into the Spanish and Italian bond markets, providing some temporary respite to global stock markets and reducing borrowing costs for these beleaguered governments, German politics has already dampened hopes that the eurozone might have a bigger pot of money to stem the financial tide.

A spokesman for Chancellor Angela Merkel, Christoph Steegmans, has been quick to take an enlarged eurozone bailout fund off the agenda. An enlarged EFSF, empowered to buy bonds on the secondary markets at July's eurozone summit, is seen by many as the necessary next step to stem the crisis (we have pointed out that it's not quite so simple for political as well as economic reasons).

However, Steegmans has said the €440bn fund will stay as agreed in July. "The EFSF will remain what it is, and keep the volume it had before July 21," he said, aware that this already sensitive deal has yet to pass through the Bundestag.

But in a matter of only a few hours, French Finance Minister Francois Baroin had contradicted Merkel's spokesman, saying in no uncertain terms that the EFSF may indeed by expanded if necessary. Reuters this afternoon quotes him saying, "The allotment is €440 billion and we've already said if we need to go further we will go further," referring to the very same July 21 summit deal. "There will be no weakness in the July 21 agreement for the euro zone. There should be no doubt about its implementation," he added.

This latest 'difference of opinion' within the Franco-German axis will only further damage market confidence, particularly since Merkel and Sarkozy released a joint statement reaffirming their unity only yesterday and made no mention of an increased EFSF. Whether Baroin's was a rogue or orchestrated comment remains to be seen, but we doubt it went down well in Berlin.