Eurozone rescue fund launched

Jean-Claude Juncker, chair of the Eurogroup: "The ESM is not a stand-alone instrument, but part of a comprehensive plan"

The eurozone's new permanent fund to bail out struggling economies and banks has been formally launched at a meeting of finance ministers in Luxembourg.

The European Stability Mechanism (ESM) will have a full lending capacity of 500bn euros (£400bn; $650bn) by 2014.

It will initially run alongside, and then eventually replace, the European Financial Stability Facility (EFSF).

Europe's largest economy, Germany, will make the biggest contribution to the fund, about 27% of its total.

The ESM, which is a new European Union agency, will be chaired by Jean-Claude Juncker, the Prime Minister of Luxembourg and chair of the Eurogroup.

The launch of the ESM "marks an historic milestone in shaping the future of monetary union", Mr Juncker said after the inaugural meeting of the Eurogroup of finance ministers that makes up the fund's board.

Countries will make their first payments towards the fund this week.

Earlier, the EU economic and monetary affairs commissioner, Olli Rehn, said: "It provides the eurozone with a robust and permanent firewall and it provides us with a strong toolbox of effective and flexible instruments.

"Thinking of where we were two-and-a-half years ago when we had no instruments of crisis management, we had to create the Greek loan facility and the temporary European facility, we are moving forward and we are supplementing the economic and monetary union with one important building block," he said as he arrived at the meeting.

"Nobody is in party mood, but I am less pessimistic for the moment for the eurozone than in the spring."

Firepower concerns

The temporary EFSF has already lent 190bn euros to Greece, the Republic of Ireland and Portugal.

Some critics believe that the 500bn-euro firepower of the ESM will still not be large enough to save the eurozone.

"The good news is that by using the funding in a wise way to support bond purchases, you can probably stretch that money quite a long way," Sarah Hewin, head of global research at Standard Chartered, told the BBC.

"The real concern is if Italy becomes involved, if there's a big shock to the system and a full bailout is required. Even 500bn euros isn't enough to cover Spain and Italy for a full three-year programme."

Having officially launched the ESM, finance ministers will now turn their attention to Greece's bailout and Spain as talks continue until Tuesday.

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Greece is heading into the sixth year of recession - there is no way it can reach the targets set for it”

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Spain has already been granted help for its banks and will receive up to 100bn euros to be targeted at its financial sector. It is widely expected to formally request a sovereign bailout.

But upon arriving in Luxembourg, German Finance Minister Wolfgang Schaeuble said that Madrid did not need any further help.

"Spain needs no aid programme. Spain is doing everything necessary, in fiscal policy, in structural reforms," he said.

"Spain has a problem with its banks as a consequence of the real estate bubble of the past years. That's why Spain is getting [EU] help with banking recapitalisation."

Greece will also be on the Eurogroup's agenda, as negotiations continue between Athens and the "troika" of inspectors from the International Monetary Fund, European Commission and European Central Bank.

But Mr Juncker said: "I don't think that we will have any major decisions on Greece."

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