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According to German and eurozone officials, Angela Merkel is prepared to let the existing European Financial Stability Facility, which has about €250 billion in unused funds, run in parallel with its successor, the €500 billion European Stability Mechanism, the launch of which has been brought forward to July.
In return, the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments.
The most recent version of the fiscal compact would allow governments to breach deficit limits in “periods of economic downturn” – a phrase criticised by the ECB as an “escape clause” that could lead to “easy circumvention” of what are meant to be cast-iron rules.
The German offer emerged as Christine Lagarde, the IMF head who met Ms Merkel, pressed Berlin for “a clear and credible timetable” to fold the existing EFSF into the ESM to increase its size.
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