EU calls for deeper union to avoid 'disintegration'
Jose Manuel Barroso - Photo EC
(BRUSSELS) - The European Commission pleaded Wednesday for a tighter eurozone union to avoid "disintegration," as it pressed France to respect deficit pledges while offering Spain more breathing space.
After stock markets dived and the euro hit a new 22-month dollar low, the head of the European Commission said big changes were needed throughout the eurozone soon "to counter this trend of financial disintegration."
"We now need to redouble our efforts," said Jose Manuel Barroso. "We need to move further and faster."
The former Portuguese premier said the "building blocks" of a full-fledged eurozone would now include "a banking union with integrated financial supervision and single deposit guarantee scheme."
Analyst Michael Hewson of CMC Markets said the eurozone was heading for "a bloodbath unless policymakers pull a rabbit out of the hat."
After 1,500 pages of reports left 12 economies under orders to carry out major reforms this year, Barroso said this would send "a very important signal in terms of the solidity and irreversibility of the euro."
As economists increasingly tip a Spanish cry for financial help from its currency partners, eurozone-wide bank deposit guarantees could assuage investor flight from Spanish public debt, Barroso suggested.
Locked in a spiral of recession and massive unemployment, Spain's debt risk premium smashed euro-era records and its borrowing costs soared over 6.7 percent -- after the central bank chief quit his post early.
Spain was to bring its public deficit to within 3.0 percent of gross domestic product by 2013, from 8.9 percent in 2011.
But if Spain reins in regional government deficits and presents a "solid" two-year budget in the coming weeks, "then we are ready to consider proposing an extension of the deadline to correct the excessive deficit by one year to 2014," EU economy commissioner Olli Rehn.
Madrid was a special case because lender Bankia, reeling from a burst property and credit bubble, has asked for government aid of 19 billion euros ($24 billion) as part of an overall package of 23.5 billion to strengthen shareholder funds.
And although direct recapitalisation of banks using the eurozone's incoming, 800-billion-euro European Stability Mechanism was "not foreseen as such in the treaty," Rehn said that this could become an "option" if private or state funding could not be found in time.
Deposit guarantees were something that hard-pressed Mediterranean states pushed for at talks among EU leaders earlier this month, but that Germany rejected.
In signs of big battles ahead, the Commission said that "this process will need to take into account legal issues such as treaty and constitutional change" across the bloc.
Barroso barely mentioned his last big idea, pooled debt sold as eurobonds, but said that "even our most important states" will be unable to compete with China or the United States unless "full integration" comes about.
He said he had "no doubts" that Germany would support this process after the eurozone's powerhouse model economy, along with Bulgaria, was taken off the Commission's deficit blacklist, joining Estonia, Finland, Luxembourg and Sweden in the good books.
But France, under the new administration of Socialist President Francois Hollande, was warned that hitting its deficit target of 3.0 percent by 2013 would prove difficult and urged it to do more to rein in public finances.
"It is therefore important that France will take effective action in order to meet its fiscal targets," Rehn said.
Among Wednesday's decisions, which have to be endorsed by EU leaders at their next summit on June 28-29, Brussels unfroze grants due to Hungary after Budapest complied with demands to reduce its deficit.
Alongside Spain and classed as an economy in "very serious" trouble was Cyprus -- which is deeply intertwined with the Greek economy.
The Commission also asked Italy, the eurozone's third-largest economy, for prompt action both on public finances and on measures most likely to generate wealth and create jobs.
France and Italy were in a group facing "serious" problems including public pension commitments or disappointing results from the fight against tax fraud, alongside Hungary and Slovenia.
Britain, Belgium, Bulgaria, Denmark, Triple A-rated Finland and Sweden were also identified as suffering from "imbalances."
Existing bailout recipients Greece, Portugal and Ireland were simply told to implement agreements already struck with the EU and the International Monetary Fund.
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