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.
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.
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”.Spain has become the fouth EU country to ask for a bank bailout help fromEU wide institutions, as it banks realise losses.
Spanish banks are under pressure for bad loans on its real estate boom that crashed in 2008. The banks were slow to acknowledge its losses. Spain’s richest region Catalonia has also ask for a central government bailout. The Greek crisis also continues, and the June 17 vote is essentially a referendum on staying in or out the euro.
Mariano Rajoy the Spanish PM has supported France’s Hollande call for eurobonds, to collectivize the debt of the 17 eurozone nations. Germany is steadfastly resisting this call. The ECB may step in again and do a LTRO and unleash cheap credit to Spanish and EU banks as it did in December when over 1 Trillion euros in loans were made.