Eurozone finance ministers set to agree €700bn bailout fund

The Guardian: Leaked draft statement ahead of Copenhagen meeting says ESM to be capped at €700bn and fall back to €500bn

More than two years into a debt crisis that has raised fundamental questions about the longevity of the euro, the single currency's finance ministers are to decide on Friday how much money they are prepared to put up to secure it.

Meeting in Copenhagen, the eurozone ministers look likely to clash over the scale of a permanent bailout fund coming into operation in July, although German insistence that it should not exceed €700bn (£580bn) looks likely to hold sway.

A draft statement leaked on Thursday said the bailout fund would be capped at €700bn and fall back to €500bn when current lending programmes expire, but that a further €240bn would be held in reserve to ensure the fund's lending capacity. At issue is whether a bigger euro firewall will deter the bond markets from attacking the eurozone's weak points – Spain and Italy – by pushing the costs of their borrowing to unsustainable levels, or whether it will simply encourage profligacy.

The Germans take the latter view. The Americans, the French, the International Monetary Fund and the Organisation for Economic Co-operation and Development argue the bigger the firewall, the greater the deterrent and therefore the less likelihood that the fund will need to be used.

"The bigger the firewall, the less risk weaker countries will be attacked by the markets," said François Baroin, the French finance minister. He said the fund should extend to €1tn, a figure also used this week by Angel Gurría, head of the OECD, calling on Europe to create "the mother of all firewalls".

That demand was dismissed on Thursday by Germany's finance minister, Wolfgang Schäuble, who is tipped to take over the chair of the eurogroup from Jean-Claude Juncker, the prime minister of Luxembourg, although that decision may be postponed on Friday. "You can make a firewall as high as you want and it will be no help," said Schäuble.

The permanent bailout fund, the European Stability Mechanism, is capped at €500bn and comes into operation in July. Germany has already shifted to a ceiling of €700bn from the initial €500bn and is unlikely to countenance any more. The European commission says this is not enough to placate the bond markets and encourage the IMF to drum up a further €500bn in crisis-fighting reserves.

Almost two years ago the eurozone established a temporary instrument with €440bn – €200bn of which is being used to prop up Greece, Portugal and Ireland. This fund, the European Financial Stability Facility, expires next year.

The German proposal is to allow the €200bn in loans from the EFSF to run their course concurrently with the new fund, meaning the total lending can be €700bn until the current programmes expire. The spare €240bn from the temporary fund, meanwhile, can be held in reserve to ensure the new fund can lend to capacity, as it will take two years for paid-in capital to be completed, limiting the lending potential until then.

The ministers will discuss what to do about Spain's fiscal quagmire as Mariano Rajoy, the prime minister who has become embattled within a few months of taking office, announces savage new spending cuts on Friday, and they will engage in ferocious horse-trading for jobs at the European Central Bank, the European Bank in London, the head of the new ESM bailout fund, and the chair of the eurogroup.

On Saturday, when the 10 other EU finance ministers join the 17 eurozone ministers, the meeting will also debate whether and how to opt for a financial transactions or "Robin Hood" tax (FTT) on the financial markets, which Britain opposes.

France and Germany are in favour but cannot muster even a eurozone consensus. Schäuble and Juncker said this week the FTT will not fly. It would not only split the EU, but also divide the eurozone.

A European commission proposal for the tax says it would raise €57bn a year. Instead ministers could opt to draft a levy on the stock markets which would raise only a fraction of that sum.