European leaders called Wednesday for the 17-nation Eurozone to create a "banking union" to collectively stabilize struggling financial institutions and protect national governments from taking on excessive debt to bail out their banks.
The proposal of the European Commission was spurred by mounting fears that Spain, the fourth-largest economy among the nations that use the euro currency, can't afford to recapitalize banks staggering under the weight of bad loans issued during a building boom that went bust with the 2008 recession.
If the Spanish government is left to bail out the nation's banks, the government itself risks becoming insolvent. Its borrowing costs have risen to record highs on fears that Spain could be the next Eurozone member to need a bailout. Spain last week promised troubled lender Bankia nearly $24 billion to keep it afloat in a sea of defaults and foreclosures on properties now worth a fraction of the prices buyers paid.
On Wednesday, interest rates on Spanish 10-year bonds reached 6.67%, the highest since Spain became a charter member of the euro club in 2002 and a rate demonstrating lenders' concerns about the stability of Spain's finances. Government officials acknowledge that borrowing at that rate is unsustainable.
"Ambitious steps to accelerate and deepen financial integration may be needed," the European Commission, the regulatory body of the 27-nation European Union, said in a report urging central regulation of the entire Eurozone banking sector. "Already before the crisis, it was acknowledged that the EU model of cross-border banking was not stable."
Whether that deeper integration and collaboration to recapitalize national banks can be done without further voter approval remained unclear. EU Commissioner Olli Rehn pointed out that neither the temporary bailout fund in place for troubled euro-based economies nor the permanent rescue fund, known as the European Stability Mechanism, has the authority to spend its money on national bank bailouts.
In the volatile atmosphere of Eurozone nations suffering high unemployment rates and drastic budget cuts, getting popular or parliamentary endorsement of changes to the institutions' powers would be time-consuming and risky, Rehn and other economic analysts have warned.
To get around the limitations, the 17 nations that use the currency have been making loans to their own struggling banks, and in the cases of Ireland and now Spain have pushed their governments to the brink of insolvency.
Differences also persist among the euro-using countries on the notion of a central banking authority. The most notably resistant is Germany, the Eurozone's leading economy and beneficiary of low interest rates, which would rise considerably if Berlin were to share the region's debt burdens.
"The German position on direct recapitalization of banks from the European rescue fund is known," said Steffen Seibert, Chancellor Angela Merkel's spokesman, when asked about the commission proposal for integration and bailout-sharing.
The commission report makes some specific recommendations for Eurozone states, including giving Spain more time, until 2014, to meet its mandated deficit reductions. Spain and France both need to further adjust retirement ages for public pensions and Ireland needs to lower its deficits and more seriously pursue tax evaders, the report says.
Irish voters go to the polls Thursday to have their say on a fiscal treaty that requires euro member countries to limit their deficits and debt. Polls suggest the Irish will approve the agreement, pushed by Merkel and ratified by five other euro users. Only countries that ratify the treaty will have access to bailout funds, and although the Irish have been chafing under austerity measures as much of the Eurozone has, its citizens may consider the rescue mechanism an important insurance policy.
The proposal for a centrally managed banking union is expected to be addressed at an EU summit in June, along with other ideas that have surfaced for easing the pain of austerity with more investment in growth in the midst of the debt crisis.
The euro nations have been pondering proposals to issue jointly backed "eurobonds" that could be used to loan money to teetering economies such as Greece and spread the interest rate burden among the entire Eurozone.
Most members of the zone, with the prominent exception of Germany, have also been calling for more spending to foster growth, create jobs, improve infrastructure and boost production and tax revenues that could be used to pay down debt later.
EU leaders met in Brussels last week for an informal brainstorming session but reportedly found little unity on how to proceed. Merkel remains adamant that heavily indebted countries pare their deficits now rather than spend more, which would add to the pressures that have sent the euro to its lowest level against the dollar in two years. The leaders agreed on little other than to revisit the spending and saving initiatives at their June summit.
The flurry of activity over how to protect the euro has been running at fever pitch since Greek and French voters early this month threw out leaders committed to austerity measures.
Greece was left without a functioning government after its fractured vote, and coalition-building talks failed among the ideologically irreconcilable parties. A repeat vote is scheduled for June 17, and Greeks in favor of remaining in the Eurozone -- a solid majority, according to polls -- say they hope to see more support this time for mainstream parties.
Concerns that Greece might elect anti-austerity figures has thrown the Eurozone into panicky speculation about whether Athens might default on its debt-reduction promises and drop out of the currency union.
The euro crisis has stoked fears for the future of the entire European integration project, a recent survey by the Pew Research Center found. The center's study of public opinion in eight EU countries, including five that use the euro, exposed a "crisis of confidence evident in the economy, in the future, in the benefits of European economic integration, in EU membership, in the euro and in the free market system,” Pew said in a statement accompanying its survey earlier this week.
Analysts say Greece would be far worse off without the euro than if it stayed in the currency union.
"I don't think the Greeks really understand how miserable their lives would be if they really got out of the Eurozone. Look what happened in Argentina when they walked away from the dollar," said Keith Crane, senior economist with the Rand Corp., comparing the predicted tumble in living standards ahead for Greece to the widespread economic misery that confronted Argentines a decade ago.
The National Bank of Greece issued results of a study Tuesday that showed Greeks would lose half their annual income and see dramatic rises in unemployment and inflation if they were to abandon the euro and reissue the drachma.
World Bank President Robert Zoellick, in an interview with The Times last week, said the real danger for the global economy if Greece leaves the Eurozone is the risk of "contagion," of investors making a run on other struggling euro nations' banks out of fear that their money isn't secure.
"You're starting to see in the markets that if Greece leaves, investors are saying, 'This could happen to Spain,' and all of a sudden you've got a currency risk that you didn't have when they were all part of the euro," Zoellick said. "If a lack of confidence leads to panic and people just start to withdraw money, the country has to guarantee banks' liabilities. If the [government] does that in the United States, people assume the [government] will be good on its word. In Europe, they're not so sure. It's not clear whether the Germans are willing to do that, at least not today."
-- Carol J. Williams
Photo: German Chancellor Angela Merkel, center, and European Commission President Jose Manuel Barroso, to her right, toast the ideals of European unity in a pub in Stralsund, Germany, on Wednesday. Credit: Guido Bergmann / Pool Photo