Spanish Prime Minister Mariano Rajoy said European leaders should reinforce efforts to protect euro- area banks, ratcheting up pressure on German Chancellor Angela Merkel to back new ideas for a resolution of the debt crisis.
With markets bracing for further deterioration in Spain’s finance sector and a possible Greek departure from the 17-member euro area, Rajoy on June 2 added his voice to calls for a more robust “banking union” in Europe, lending his support for a centralized system to re-capitalize lenders. On the same day, Merkel toughened her opposition to euro-area debt sharing, telling members of her party in Berlin that “under no circumstances” would she agree to German-backed euro bonds.
“The EU needs to reinforce its common institutional architecture so that investors regain confidence in the single currency,” Rajoy said in the Spanish coastal town of Sitges near Barcelona. “Spain will emerge from the storm through its own efforts and with the support of our European partners.”
As euro-area unemployment reached its highest level on record, manufacturing output contracted for a 10th straight month in May and the currency plunged close to a two-year low against the U.S. dollar, leaders continued to wrangle over the details of support for the currency bloc. President Barack Obama meanwhile laid the blame for sluggish U.S. employment at the feet of euro-area leaders, saying they haven’t done enough to resolve the crisis, now in its third year.
Merkel’s isolation was underlined yesterday by the new French Finance Minister Pierre Moscovici, who said that aid for troubled European banks should come through the European Stability Mechanism rather than through governments. “We need to go toward a banking union,” Moscovici said on RTL radio.
Any request for bank aid must be made by sovereign states, Norbert Barthle, budget spokesman for Merkel’s Christian Democrats in parliament, said in a May 29 interview, citing the need for national governments to act as guarantors.
Merkel and Finance Minister Wolfgang Schaeuble have urged Rajoy to accept an international bailout, Der Spiegel magazine reported, without saying where it obtained the information. Spain’s El Pais said yesterday that the European Union is also pressing Spain to accept funds, citing unidentified officials in Brussels. Merkel’s chief spokesman Steffen Seibert and a Spanish government official declined to comment on the reports.
‘Future of Europe’
Cyprus, the bloc’s third-smallest economy, is also increasingly likely to seek a bailout if recapitalization efforts for Cyprus Popular Bank’s fail, ECB Governing Council member Panicos Demetriades said yesterday. Greece, Ireland and Portugal have already received assistance.
Billionaire investor George Soros, speaking yesterday in Trento, Italy, said that European leaders, foremost among them Merkel, have a three-month window in which to “correct their mistakes and reverse the current trends.”
“We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be,” Soros said. “The future of Europe depends on it.”
Yields on German two-year notes fell below zero for the first time ever last week as investors fled riskier sovereign debt. Spanish bonds dropped for a fourth week, pushing the country’s 10-year yields above 6.5 percent — nearing the 7 percent threshold which triggered the three earlier bailouts.
Struggling to shore up confidence in Spain’s banking industry, Rajoy urged euro-area nations to “cede more sovereignty” to a central fiscal authority and endorsed the European Commission’s call for a banking union that would entail a single regulator and a deposit-guarantee fund.
Such a union, comprising a central rescue fund for lenders and centralized deposit guarantees, would only emerge “at the end of a long path,” Bundesbank Vice President Sabine Lautenschlaeger told the June 2 edition of Frankfurter Allgemeine Zeitung.
The shared risk implied by a supranational euro fund “can only be a success in a fiscal union with central controls and intervention rights,” Lautenschlaeger told the newspaper.
Facing down criticism that Germany needs to relent in its opposition to a range of proposals from jointly issued debt to channeling funds to banks, Merkel added nuance to her position on centralized controls last week by welcoming a set of Commission proposals calling for such measures and referring to “possibilities for greater cooperation.” The German leader meets European Commission President Jose Barroso in Berlin today.
“We could certainly make clearer to international financial markets what’s going on in Europe in terms of new institutions and new possibilities in order to relieve the concern that perhaps banks are unstable,” Merkel told reporters in Stralsund, Germany, on May 31, following a reference to banking insurance. She added that certain changes would require treaty amendments and suggested a time line of “five to 10 years.”
The chancellor’s hard line on debt sharing has been challenged by Italian Prime Minister Mario Monti, who told Greece’s To Vima yesterday that euro bonds will occur in some form. Monti will host a meeting with Merkel, Rajoy and French President Francois Hollande in Rome on June 22, ahead of the next EU summit at the end of the month.
Those meetings take place after Greece holds its second election in as many months on June 17, with polls signaling a risk that no party will win an absolute majority. The possibility that a coalition supporting the European bailout package will again fall short has stoked speculation that the country could leave the monetary union and fragment a bloc designed to be unbreakable.
As crisis-resolution talks continue, Obama has become more vociferous in his call to action, with the impact of Europe’s troubles increasingly cited beyond the EU’s borders. The U.S. president said on June 1 that the slowest month of employment growth in a year was partly “attributable to Europe and the cloud that’s coming over from the Atlantic.”
Obama dispatched Lael Brainard, Treasury undersecretary for international affairs, to Europe last week for a three-day visit for talks with officials overseeing the crisis. She traveled to Athens, Madrid, Paris, Frankfurt and Berlin.
“Europe is having a significant crisis in part because they haven’t taken as many of the decisive steps as were needed to deal with the challenge,” Obama said in Minneapolis.