* Germany faces pressure to increase ESM
* Austria's Faymann says 500 billion euros not enough
* German opposition calls ESM insufficient
By Erik Kirschbaum
BERLIN, Jan 29 Chancellor Angela Merkel
tried to deflect growing international pressure on Germany to
agree an increase in the euro zone's bailout funds on Sunday by
saying talks were still continuing.
Amid calls to raise the size of the permanent European
Stability Mechanism (ESM) ahead of an EU summit on Monday,
Merkel was asked by Bild am Sonntag newspaper about "rising
pressure" on Germany to "massively increase" the bailout fund.
But the chancellor did not address the issue of whether
Germany would back raising the ESM and instead answered a
question about what impact increasing the ESM might have on the
German budget this year.
"The negotiations are continuing on whether we'll pay in our
contribution in one tranche or two tranches," said Merkel, who
has resisted calls for Germany to back increasing the bailout
funds in part due to opposition in her centre-right coalition.
"But independent of all that, our deficit level as far as
the European Stability Pact is concerned will not be increased
as a result because the money won't be gone. It's only to be
transferred from the federal budget to the ESM."
Merkel is keen to avoid the EU summit being sidetracked by
debate about whether extra funding should be funnelled into the
euro zone bailout funds, as the International Monetary Fund and
some euro states -- including Italy and Spain -- have suggested.
A close Merkel ally in parliament, Peter Altmaier, said it
made sense to first see how effective the ESM is.
"It would be good if we make good use of the amounts that
are now available," Altmaier, a senior MP, told German radio.
Austrian chancellor Werner Faymann said in an interview in
Der Spiegel news magazine he believed the 500-billion euro ESM
firewall may need to be raised, echoing appeals made in Berlin
by IMF head Christine Lagarde and Italian premier Mario Monti.
"I wouldn't promise my parliament that 500 billion euros
will be enough," Faymann said, adding his government was
preparing to contribute to a higher firewall by taking funds
from the European Financial Stability Facility (EFSF).
"This is the direction it should go -- that way we'd come up
with a total of about 750 billion euros," he said. "Financial
markets are observing us closely and measuring how strong we are
by looking at the size of the firewall. If it's too low, we'll
be giving the markets a reason to speculate against us."
German government sources have told Reuters Merkel does not
rule out boosting funds if the euro zone crisis deteriorates
over the coming months. But only the threat of a disaster may
persuade her coalition to back more funds for the currency bloc.
The German government believes that there should not be any
discussions about increasing the firewall until March.
The leader of Germany's centre-left opposition in
parliament, Frank-Walter Steinmeier, said Merkel was making a
mistake by resisting calls to raise the ESM.
"You can argue whether continually coming up with new
bailout funds is the right way to go," Steinmeier told the Welt
am Sonntag newspaper. "But for those who decide in a situation
like this to set up a permanent bailout fund, they should
realise that this one is definitely not big enough."
Steinmeier, foreign minister under Merkel in the 2005-2009
grand coalition and a possible challenger in 2013, said that
Merkel had failed to inspire public confidence during Europe's
worst post-war crisis, by repeatedly changing course.
"She has annoyed a lot of people and put them off on Europe
by continuously changing direction," said Steinmeier.
"As Europe's strongest export nation we have a fundamental
interest in preventing this crisis from becoming a permanent
recession for all of Europe," he added. "If Europe isn't doing
well, then Germany won't be doing well either."