FRANKFURT, Germany — As Europe’s debt crisis intensifies, top officials say the continent urgently needs a central authority with the financial muscle to fix its broken banks.
The proposal could give immediate relief to Spain’s increasingly fragile economy, with its borrowing rates rising to unsustainable levels, rattling investors.
The European Commission called Wednesday for a “banking union” that can oversee and, if needed, bail out banks without having to go through national governments. It would have the power to force banks to heal their finances and also have access to a pool of money to rescue banks, lifting pressure off individual countries – such as Spain – that are already strapped for cash.
Germany resists allowing a central body to spend money – much of which Berlin provides — to rescue banks around Europe. But markets nudged Spain, the fourth-largest economy in the eurozone, ever closer to needing financial aid that Europe can scarcely afford to give it. Its 10-year bond yield rose to 6.64 percent on Wednesday, close to the 7 percent threshold that caused Greece, Ireland and Portugal to need financial assistance previously. Stock markets tanked globally, with the Dow falling 1.3 percent and Madrid’s index down 2.6 percent.
Spain is in a particularly bad situation because its banks are not only holding massive amounts of shaky government bonds, but also sit on huge real estate investment losses. One of them, Bankia, asked for $23.6 billion last week. How the government, which has been making savage austerity cuts to lower its debts, will afford that – and other potential bailouts – worries investors.
Adding to the pressure, depositors in some countries, most notably Greece, have been pulling their money out of banks. There are concerns that Greece might have to leave the eurozone if political parties that reject its bailout terms come to power next month. While the drain in deposits from banks in Athens has so far been slow, some fear it could become a quickly devastating bank run.
The solution, economists and a number of European Union policy makers say, is to cut the knot between governments and banks. Europe should create a central banking authority with the power and the money to take broken banks off governments’ hands – and override national regulators who may be reluctant to force expensive and politically painful restructuring of failed financial institutions.
The current European Banking Authority lacks such sweeping powers.
“Already before the crisis, it was acknowledged that the EU model of cross-border banking was not stable,” the European Commission said in a report Wednesday. The commission suggested that the permanent European bailout fund could be permitted to put money directly into banks, bypassing the governments.