Europe ponders 'banking union' to avert further euro crises

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."

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-- 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

Eurozone without Greece increasingly imaginable -- outside Athens

Despite the first hopeful sign this week that Greece might manage to put a government together, European Union neighbors and global economic analysts are increasingly skeptical that Athens will be able to remain in the Eurozone.

Greeks, on the other hand, say they can't imagine giving up their membership in the common currency club that has been the crowning achievement of a nation that has gone from military dictatorship to a thriving, if often unruly, democracy in less than four decades.

Even Alexis Tsipras, who has been brashly talking about halting payment on the country's staggering debt, hasn't cast the outpouring of Greek voters' resentment toward austerity measures imposed in exchange for bailouts as a move to exit the 17-nation Eurozone. Rather, he and other leftist leaders say, the threat of default is aimed at pressuring Germany and the troika of international creditors to ease up on the spending-cut mandates that have put 1 in 4 Greeks out of work, slashed national income by 25% and boosted taxes by more than 20%.

But after Sunday's election tossed out the government that agreed to the harsh terms of the bailout,  the word from the European Union, the European Central Bank and the International Monetary Fund has been that Greece is expected to live up to its obligations.

German Finance Minister Wolfgang Schaeuble, major bank economists and political analysts around the world are now acknowledging that Greece may have little choice but to default on its obligations and restore the drachma as the national currency, which it can prop up or devalue as Greeks see fit.

“They will decide whether to stay in the Eurozone or not,” Schaeuble said during a visit to Brussels, echoing comments made by German Chancellor Angela Merkel that the conditions imposed in exchange for bailouts over the last two years aren't up for renegotiation.

Fotis Kouvelis, leader of Greece's Democratic Left, which got about 6% of Sunday's vote, raised hopes Thursday of a possible governing coalition emerging this weekend after what he described as a meeting of the minds with Socialist leader Evangelos Venizelos on the need to remain in the Eurozone but begin a "gradual disengagement" from the harsh austerity measures. Venizelos said his views and those of Kouvelis were "very close," but gave no indication that an agreement on a government was likely during the Socialists' three-day turn at leading the negotiations.

Greek President Karolos Papoulias is expected to make a last-ditch effort Saturday at bringing the political forces into a government of national unity. Meanwhile, talk has begun to turn in favor of calling a fresh election next month and trying to unite centrist parties so the vote is less scattered, said Ruby Gropas, a law school lecturer on international relations and scholar at Athens' Hellenic Foundation for European and Foreign Policy.

"There is completely unquestioned commitment to Europe and the euro," said Gropas, calling her homeland's entrance into the Eurozone among its proudest achievements in the postwar era and a stabilizing political influence despite its sharp bite into family budgets. "What is being challenged is the austerity measures. The pressures of globalization have been too huge, but the only way we can mitigate and manage this crisis is through a European approach."

Polls in Greece show unshaken popular support for the common currency, with a recent survey finding 77% of respondents claiming to be willing to do whatever is necessary to keep their euros.

But the popular opinion survey that counts most, Sunday's election, sent a resounding blast of opposition to the cuts in government jobs and public spending imposed on Greece in return for triple-digit billions in bailout money to keep the country afloat. No party got anywhere near a majority, with the conservative New Democracy Party coming in first with less than 19%, and the Socialists barely clearing 13%. The rest of the vote went to a smattering of fringe parties that had campaigned against the austerity measures.

Stumbling through another month of a political vacuum while arranging a new election would be nerve-wracking, Gropas said, but the alternatives for Greece and its creditors are worse. Sunday's vote was so fractured and spanned from the extreme right to the far left that 1 in 5 ballots was cast for parties that didn't clear the 3% threshold to gain seats in Parliament. That is a sizable chunk of support for centrist forces that, if united and aligned with the traditional political parties that have governed Greece for decades, would provide a clear majority to push through reforms long overdue and demanded in exchange for the bailouts, Gropas said.

"I don’t have a choice but to be confident. The other option, leaving the Eurozone, is not imaginable," she said. "A lot of unthinkables have happened in Europe and Greece in the last two years, but this is something nobody wants."

What Greece wants and what it can have may be different prospects, according to economists and analysts at major banks and think tanks. Ross C. DeVol, chief research officer at the Milken Institute in Santa Monica, said Greece never met the European Union criteria for membership in the Eurozone and he believes "it is just a matter of time" before it abandons the common currency or gets kicked out for failing to meet its obligations.

"At some point, the Greek people have to decide what path they want to choose, whether it is more important to remain part of the Eurozone for European unity purposes, or are the draconian measures to do so too severe and the path forward for them is the need to restore competitiveness, drop out of the Eurozone and go back to the drachma," DeVol said.

Were Greece to miss next month's deadline for cutting more jobs and public spending, the lending troika would have to write down much of its debt, DeVol said. The loss would be absorbable for the huge institutions, he said, but could have a contagious effect in weakening the commitment to the common currency in other struggling euro economies, including Portugal, Ireland and Spain.

"The important domino is Spain," DeVol warned. "The European Union, the European Central Bank and Eurozone officials do not have a sufficiently large bazooka in place to withstand a potential sovereign debt default in Spain."

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Photo: Greek protests against austerity measures have become daily occurrences as Greeks have struggled through soaring taxes and falling incomes. Some, as in the June demonstration shown above, have turned violent. Credit: Yiorgos Karahalis / Reuters

Africa -- the next frontier for virtual currency?

If you’ve heard of Bitcoin, you might be a computer geek. The virtual money aspires to become a universal currency that doesn’t depend on governments or banks.

Cutting out the banks results in cheaper transactions, Bitcoin backers say. Online payments pass from person to person without using a bank as the middleman. And unlike electronic payments with ordinary currency, governments can’t halt Bitcoin payments, an idea that appeals to libertarians.  

So far, Bitcoin hasn't made its way into the mainstream. It is still a relatively fringe idea viewed  skeptically by many economists.

Yet Bitcoin has surprised some of its critics, stabilizing in value after its price peaked and plummeted last year. Bitcoin backers insist that despite its past troubles, the digital currency will prove itself. And they’re now hoping to take their virtual money to a somewhat surprising new market: Africa.

German software developer and Bitcoin exchange consultant Rudiger Koch recently pitched the idea in Nigeria, arguing that Bitcoin has advantages for African countries. Bitcoin has no inflation tax, unlike ordinary cash. It could be spent and shared using cellphones, which are ubiquitous in much of Africa. Cellphone systems that let people transfer money by text message are already used in Kenya.