Italy's premier Mario Monti has told Berlin that the new European Stability Mechanism (ESM) must be doubled to €1 trillion (£828bn) to restore investor confidence in southern European debt, according to Der Spiegel.
The move comes days after Mr Monti warned German Chancellor Angela Merkel that austerity fatigue is growing in the debtor states and there will be a "powerful backlash" unless the creditor powers led by Germany do more to correct North-South imbalances and lower borrowing for the whole eurozone.
In what appears to be a coordinated move by the Latin bloc, Spanish foreign minister José Manuel García-Margallo y Marfil backed the plan for a bigger rescue fund. He called for an EMU debt union and sweeping changes to the structure of the eurozone.
Mr García-Margallo exhorted the ECB to step up bond purchases in a fully-fledged campaign of quantitative easing, implicitly suggesting a blitz of up to €2 trillion on top of the unlimited credit already provided to banks at 1pc for three years.
"The European Central Bank can do much more than it has done: it has bought European debt equal to just 2pc of GDP while the Bank of England has done 20pc," he said.
Italy and Spain are both falling back into double-dip recessions. The International Monetary Fund (IMF) forecasts that their economies will contract by 2.2pc and 1.7pc respectively this year.
Plans for the IMF to help shore up Europe by boosting its own reserves to $1 trillion (£643bn) have already run into trouble. Sherpas preparing the next G20 meeting said Japan, China, Korea, and Brazil have misgivings, while America has openly refused to participate. All are reluctant to put up money until Germany stops invoking ideology and allows the eurozone to mobilise its own vast resources.
The ECB's chief Mario Draghi has backed the Monti proposals, tabling plans to top up the ESM with the unused reserves of the existing bail-out fund (EFSF), a move that would boost the rescue machinery to €750bn. The ESM comes into force this summer as a permanent body.
The proposals are certain to cause heartburn in Berlin where the Bundestag has set an iron-clad limit on German contributions of €211bn. Any further commitments would require a fresh vote, risking a revolt by Mrs Merkel's Bavarian and Free Democrat allies.
Germany is already facing extra demands after Standard & Poor's stripped France and Austria of their AAA rating. The bail-out fund is anchored on the shrinking AAA core.
Mrs Merkel's spokesman said Germany will not offer more money. "We have no doubt that the EFSF has the means necessary to fulfil its current obligations".
Eurozone finance ministers will flesh out details on the ESM at a meeting today. Joachim Fels from Morgan Stanley said text will be scrutinised for any hint that the ESM would be given a banking licence. This would allow it to borrow from the ECB to purchase bonds, giving it decisive firepower.
In Madrid, Mr García-Margallo said the European Investment Bank should be mobilised to kick-start Europe's economy with investments on the scale of the Marshall Plan, accompanied by €120bn spending of EU funds on youth unemployment, now 49pc in Spain and 45pc in Greece.
He said the time has come for Euroland to cross the Rubicon and create a debt union. "We have to give a clear signal that all these solemn declarations that we will save the euro are not pure rhetoric. We have to move from words to deeds, and that means mutualisation of debt," he told El Pais.
The Telegraph
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