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Eurozone faces 'financial disintegration' unless it acts again, warns commission Eurozone faces 'financial disintegration' unless it acts again, warns commission
(40 minutes later)
The eurozone is confronted with the prospect of "financial disintegration" and should use its new bailout fund to recapitalise distressed banks directly while embarking on a transnational banking union, the European commission said today.The eurozone is confronted with the prospect of "financial disintegration" and should use its new bailout fund to recapitalise distressed banks directly while embarking on a transnational banking union, the European commission said today.
Delivering more than 1,000 pages of diagnosis and policy prescriptions on the dire condition of the European economy and how to try to end almost three years of euro crisis, the commission also talked up the merits of eurobonds or pooling of eurozone debt, a proposal gaining in traction but strongly resisted for now by the biggest economy, Germany.Delivering more than 1,000 pages of diagnosis and policy prescriptions on the dire condition of the European economy and how to try to end almost three years of euro crisis, the commission also talked up the merits of eurobonds or pooling of eurozone debt, a proposal gaining in traction but strongly resisted for now by the biggest economy, Germany.
With international attention focused on Spain wrestling with an escalating banking crisis, the commission was surprisingly critical of Mariano Rajoy's attempts to chart a way out of an extreme predicament – recession, soaring national debt, a ballooning budget deficit, the highest unemployment in Europe, and the banks sitting on tens of billions of toxic assets from the bust property bubble.With international attention focused on Spain wrestling with an escalating banking crisis, the commission was surprisingly critical of Mariano Rajoy's attempts to chart a way out of an extreme predicament – recession, soaring national debt, a ballooning budget deficit, the highest unemployment in Europe, and the banks sitting on tens of billions of toxic assets from the bust property bubble.
"The policy plans submitted by Spain are relevant, but in some areas they lack sufficient ambition to address the challenges," the commission's Spanish report card said."The policy plans submitted by Spain are relevant, but in some areas they lack sufficient ambition to address the challenges," the commission's Spanish report card said.
On banking regulation, administrative reform, labour market changes, growth and competitiveness policies, "the national reform programme does not contain any specific plans for addressing the challenges".On banking regulation, administrative reform, labour market changes, growth and competitiveness policies, "the national reform programme does not contain any specific plans for addressing the challenges".
Tax system reforms, meanwhile, were going "in the opposite direction" to that recommended by Brussels.Tax system reforms, meanwhile, were going "in the opposite direction" to that recommended by Brussels.
"Spanish banks still have large exposures to the real estate and construction sectors (amounting to about 10 % of total consolidated assets in December 2011). Over a half of this exposure is already problematic and may eventually rise further as developers prove unable to sell their assets and make repayments," the commission said. "Spanish banks still have large exposures to the real estate and construction sectors (amounting to about 10% of total consolidated assets in December 2011). Over a half of this exposure is already problematic and may eventually rise further as developers prove unable to sell their assets and make repayments," the commission said.
Overall in the eurozone, the sovereign debt crisis of the past 30 months had fostered "a very dangerous" degree of "interdependence of weak banks and weak sovereigns".Overall in the eurozone, the sovereign debt crisis of the past 30 months had fostered "a very dangerous" degree of "interdependence of weak banks and weak sovereigns".
The European Central Bank's intervention last December, throwing a trillion euros of cheap three-year loans at European banks over a period of three months, had brought a respite. But the commission said that this was merely temporary and that investors' confidence was again evaporating. Despite the liqudity help, the banks were failing to lend, raising the chances of a credit crunch in Europe wrecking growth prospects and causing unemployment to rise from current 15-year highs. The European Central Bank's intervention last December, throwing a trillion euros of cheap three-year loans at European banks over a period of three months, had brought a respite. But the commission said that this was merely temporary and that investors' confidence was again evaporating. Despite the liquidity help, the banks were failing to lend, raising the chances of a credit crunch in Europe wrecking growth prospects and causing unemployment to rise from current 15-year highs.
"At this stage, there is no clear-cut evidence that the deleveraging process has become excessive or disorderly with disruptive consequences on the real economy. Nevertheless, the heterogeneity across Member States is large and the aggregate picture may hide different situations at country level," the commission said. "At this stage, there is no clear-cut evidence that the deleveraging process has become excessive or disorderly with disruptive consequences on the real economy. Nevertheless, the heterogeneity across member states is large and the aggregate picture may hide different situations at country level," the commission said.
Given the gravity of the situation, the commission, whose recommendations are to be put to a summit of EU leaders in Brussels at the end of next month, outlined a quantum leap in fiscal and economic union going beyond the scope of the EU's Lisbon Treaty and which would require a new EU charter. Given the gravity of the situation, the commission, whose recommendations are to be put to a summit of EU leaders in Brussels at the end of next month, outlined a quantum leap in fiscal and economic union going beyond the scope of the EU's Lisbon treaty and which would require a new EU charter.
While also hedging its bets, the commission stressed the merits of eurobonds, a eurozone banking union, deploying the European Stability Mechanism — the permanent bailout fund being made operational in July - for direct loans to banks rather than to governments, as required by the ESM treaty. While also hedging its bets, the commission stressed the merits of eurobonds, a eurozone banking union, deploying the European Stability Mechanism (ESM) – the permanent bailout fund being made operational in July – for direct loans to banks rather than to governments, as required by the ESM treaty.
"Additional reforms to economic governance may be considered to complete the institutional structure of monetary union," the commission said. "The changes made so far have in some cases touched on issues traditionally tied to national sovereignty. In some instances, they appear to have exhausted the scope of action possible under the [Lisbon] Treaty … The question remains as to whether stronger coordination of economic policies will be sufficient or whether there needs to be progress towards closer integration of economic policy-making. The crisis experience has underlined the importance of this issue." "Additional reforms to economic governance may be considered to complete the institutional structure of monetary union," the commission said. "The changes made so far have in some cases touched on issues traditionally tied to national sovereignty. In some instances, they appear to have exhausted the scope of action possible under the [Lisbon] treaty … The question remains as to whether stronger co-ordination of economic policies will be sufficient or whether there needs to be progress towards closer integration of economic policy-making. The crisis experience has underlined the importance of this issue."
The commission said that there were signs of banks' deleveraging, retreating behind national borders, divesting their foreign subsidiaries. The commission said that there were signs of banks deleveraging, retreating behind national borders and divesting their foreign subsidiaries.
"To counter this trend of financial disintegration, more coordination at European level is required in supervision and crisis management frameworks. More specifically, closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a 'banking union' would be an important complement to the current structure of monetary union." "To counter this trend of financial disintegration, more co-ordination at European level is required in supervision and crisis management frameworks. More specifically, closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a 'banking union' would be an important complement to the current structure of monetary union."
"To sever the link between banks and the sovereigns, direct recapitalisation by the ESM might be envisaged," it added. The proposal is again fiercely resisted by Berlin, but supported by the new French president, François Hollande, by Washington, and is also gaining support at the European Central Bank."To sever the link between banks and the sovereigns, direct recapitalisation by the ESM might be envisaged," it added. The proposal is again fiercely resisted by Berlin, but supported by the new French president, François Hollande, by Washington, and is also gaining support at the European Central Bank.
Talking up the advantages of eurobonds, the commission sought to appeal to German reservations by stating that "the net effects of common issuance will be positive only if the potential disincentives for fiscal discipline can be controlled".Talking up the advantages of eurobonds, the commission sought to appeal to German reservations by stating that "the net effects of common issuance will be positive only if the potential disincentives for fiscal discipline can be controlled".