German chancellor Angela Merkel has said she is open to establishing a European banking authority as a long-term solution to the continent’s financial crisis.
Her support as leader of the EU’s biggest economy could be crucial for the concept, which aims to strengthen the eurozone and calm jittery markets.
Europe’s worsening debt crisis is raising concerns well beyond the continent. Finance ministers and central bank presidents of the world’s seven wealthiest countries – which includes Germany – were expected to hold an emergency conference call today to discuss the situation.
The proposal to create a Europe-wide authority overseeing and ultimately guaranteeing the banks’ stability was first floated last week by the European Commission, the executive body of the EU. But rich countries such as Germany have been lukewarm about the idea because of fears it could eventually lead to them bailing out other countries’ banks.
Yesterday Ms Merkel told reporters ahead of a private session with EU Commission president Jose Manuel Barroso that the pair “will also talk about to what extent we have to put systemically (important) banks under a specific European oversight”.
And while she expressed willingness to consider the concept, she stressed that a banking union cannot be set forth as a quick fix, but rather as a more long-term goal.
The European Central Bank is the joint monetary authority for the 17 nations who use the euro currency, but each country is responsible for overseeing its own banks. So when things go wrong, each country has to decide whether or not to bail its banks.
For instance, Spain – already under market pressure due to its debt burden and declining economy – needs to provide €19bn in government aid to rescue its most ailing lender. And although the Spanish government has promised to help Bankia, it has yet to explain where the bulk of the money will come from.
Spanish officials have called for Europe’s new permanent rescue fund to be able to recapitalise banks directly, but German officials, among others, have ruled that out, noting that Europe cannot bail out national banks if it has no supervision over them.
Mr Barroso maintained that a “banking union with more integrated financial supervision and deposit guarantees” was the necessary step to complete the monetary union with an economic union.
Europeans must do “whatever is necessary to ensure the stability of our currency”, he added.
European Central Bank president Mario Draghi warned last week the ECB cannot “fill the vacuum of the lack of action by national governments”, calling the monetary union’s current structure “unsustainable unless further steps are taken”.
He strongly endorsed the commission’s proposal to create a Europe-wide banking regulator.
Ms Merkel reiterated her conviction that the short-term priority in tackling the continent’s financial crisis must be combining fiscal consolidation with fostering economic growth through reforms and better use of existing funds.
Still, she echoed Mr Barroso’s call to strengthen European integration. “It is completely obvious, and I have often said that: in the eurozone we need at minimum more Europe and not less Europe,” she said.
Ms Merkel said Europe’s institutions, such as the commission needed more powers, “otherwise a currency union cannot work”. Europe’s new treaty, which enshrines fiscal discipline and creates a more centralised oversight, was “a first step” in that direction, she added.
The intensified debate on policy ideas to strengthen the bloc’s political union comes as the eurozone enters another tumultuous period of financial and political instability.
Investors are worried that Spain will be unable to prop up its banks that are burdened by toxic bad loans – and that it will follow Greece, Portugal and Ireland in asking for an international bailout the eurozone can ill afford. These jitters have sent Spain’s borrowing costs soaring and stock markets plummeting.
And in two weeks Greece returns to the polls with the real possibility that it might elect a government that rejects the terms of its multibillion-dollar bailout. This could force the country out of the euro, fracturing the eurozone and further roiling markets.
Perhaps the clearest sign of danger is the state of the euro itself. It is trading around two-year lows against the dollar as investors pull money out of euro countries.
Canadian finance minister James Flaherty told reporters yesterday that he would raise Europe’s troubles with his Group of Seven colleagues during today’s emergency conference call. The G-7 includes the United States, Japan, Germany, France, Britain, Italy and Canada.