Merkel deflects calls for bigger euro zone firewall

DAVOS, Switzerland Wed Jan 25, 2012 6:55pm EST

German Chancellor Angela Merkel speaks during the opening of the Annual Meeting 2012 at the World Economic Forum (WEF) in Davos, January 25, 2012. REUTERS/Christian Hartmann

German Chancellor Angela Merkel speaks during the opening of the Annual Meeting 2012 at the World Economic Forum (WEF) in Davos, January 25, 2012.

Credit: Reuters/Christian Hartmann

DAVOS, Switzerland (Reuters) - German Chancellor Angela Merkel deflected pressure on Wednesday to increase the euro zone's rescue fund, saying the key to reassuring markets was to restore lost trust in governments' policies.

She also said closer European integration would eventually bring a solution to the 17-nation currency area's debt crisis.

"We must be ready to dare more Europe," she said.

Delivering the keynote address to the annual World Economic Forum meeting in Davos, Merkel questioned the rationale of those in financial markets, governments and the IMF who were pressing Berlin to put more money on the table, but did not rule it out.

International Monetary Fund Managing Director Christine Lagarde called in Berlin this week for the 17-nation currency bloc's financial firewall to be effectively doubled by combining a temporary and a permanent rescue fund to reach 1 trillion euros.

"Now they say... 'it should be twice as big'," Merkel said.

"'If it were twice as big, we'd believe you'. Some say 'it should even be three times as big, then we'd really believe you.' And I always ask myself how long is that credible and when is that no longer credible.

"What we don't want (in Germany) is a situation in which we promise something we can't back up in the end because if Germany... promises something that can't be kept if markets attack it hard, then Europe is really vulnerable."

EU officials say they expect Berlin to agree in March to let the existing European Financial Stability Facility, which still has about 250 billion euros in uncommitted funds, and the future 500 billion euro European Stability Mechanism to run in parallel.

Merkel did not comment on that idea but said Europe had to work to rebuild market trust through stricter enforcement of more binding fiscal rules and reforms to make their economies more competitive.

"Confidence has been lost because one said 'they've promised something that they didn't deliver on'," she said. "Confidence is the most important currency that one can have worldwide at the moment."

She said she was convinced the euro zone would overcome the two-year-old sovereign debt crisis and emerge as a more attractive place to invest.

The German leader set out a long-term vision of a more federal European Union, in which she said she expected almost all member states to join the euro.

"We will have to get used to the fact that the European Commission, which already has lots of competences, will become more and more like a government," Merkel said.

This was already a familiar pattern to Germans, who had a division of labor between federal and regional state powers.

"We will have a rather stronger European Parliament, the heads of state and government will function a bit like a second chamber, and the European Court of Justice will be uphold the rule of law," she added.

(Reporting By Erik Kirschbaum and Annika Breidthardt; Writing by Paul Taylor; editing by Janet McBride)