EU Proposes a “Banking Union” to Fight Debt Crisis
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In a radical policy shift, the European Commission has called for the creation of a “banking union” that can centrally oversee and if necessary bailout the banking sector. As concerns over Spain’s financial health continue to grow, the policy shift would allow the banking union to share the burden of bank failures, without having to go through national governments.
In a radical policy shift, the European Commission has called for the creation of a “banking union” that can centrally oversee and if necessary bailout the banking sector. As concerns over Spain’s financial health continue to grow, the policy shift would allow the banking union to share the burden of bank failures, without having to go through national governments.
Outlining the economic strategy for the eurozone, the proposal, which appears to directly address the concerns about problems in the Spanish banking sector could give immediate relief to Spain, with its borrowing costs rising to unsustainable levels.
Spain, the eurozone’s fourth largest economy, saw its 10-year bond yield rise to 6.64 percent yesterday, dangerously close to the 7 percent threshold that crippled Greece, Ireland and Portugal.
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Calling for the creation of a “banking union”, the European Commission said closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and crisis burden sharing, would be an important complement to the current structure of the eurozone.
The European Commission added:
[quote] In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the European Stability Mechanism might be envisaged. [/quote]
The radical policy shifts not only set the European Commission on a direct collision course with Germany, but also seem to address investor concerns that weaker eurozone economies such as Spain will be engulfed by their banks’ debt.
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President of the Commission, Jose Manuel Barroso said:
[quote] The Commission will advocate an ambitious approach. The building blocks could include a banking union with integrated financial supervision and a single deposit guarantee scheme. And our ideas on euro bonds are already on the table. [/quote]
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European stock markets pared losses and the euro jumped on the back of the recommendations, even though they are not formal proposals and will be discussed by European leaders in June.
Already, the recommendations face serious opposition from some member states and remain a long way from implementation.
Under treaty on which the ESM is legally based, the eurozone’s permanent bailout fund can only lend directly to sovereigns, and not to banks, even if it is for the purpose of bank recapitalisation.
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