The EU’s bailout fund has moved closer to being able to directly pump money into troubled banks after the German government introduced a bill allowing direct bank recapitalisation.

The draft law will now require approval in the Bundestag, but is planned to enter into force in November.

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“This is an important step to stabilise our financial sector … and to increase further the trust in our common European currency,” said finance minister Wolfgang Schaeuble on Wednesday (9 July).

He added that the law would help “rule out the risk that the taxpayer would have to accept liability, as in the financial crisis”.

EU leaders agreed in 2012 that the bloc’s bailout fund, the so-called European Stability Mechanism (ESM), should be able to directly buy a stake in a struggling bank if a country failed to raise money from private investors and national funds.

They later earmarked €60 billion of the ESM’s €500 billion fund for an “instrument” to handle direct bank recapitalisation.

But Germany blocked the scheme from entering into life, amid fears that allowing the ESM to pump money directly to banks would increase the liabilities of German taxpayers.

Its change of heart comes after MEPs and ministers set up an arsenal of financial fire-fighting tools, including national and EU-based resolution funds, as well as rules setting out who will assume losses if a bank gets into difficulties.

The ESM instrument is of particular interest to the likes of Ireland, which pumped billions into its stricken banks between 2009 and 2011 and was ultimately forced into a €67 billion EU bailout as a result.

One of the provisions of the instrument is that funding could be applied retroactively, relieving the burden on governments, although this would have to be agreed on a case by case basis by the governors of the bailout fund.

Putting the direct recapitalisation rules into law this year was a key demand of the European Central Bank (ECB), which assumes its responsibilities as the eurozone’s chief banking supervisor in the coming months.

Elsewhere, ECB chief Mario Draghi called for the eurozone’s economic laggards to be compelled to change policies to increase their competitiveness in a speech on Wednesday in London.

Noting that Finland was ranked third in the World Economic Forum’s competitiveness ranking, compared to Greece on 91, he added that struggling economies were a threat to the bloc.

“There is a case for some form of common governance over structural reforms,” Draghi said, adding that “a continuously high level of productivity and competitiveness - is not merely in a country’s own interest. It is in the interest of the union as a whole.”