Spanish Prime Minister Mariano Rajoy ratcheted up pressure on German Chancellor Angela Merkel to back new ideas for a resolution of the debt crisis as he urged European leaders to bolster efforts to protect banks.
With markets bracing for further deterioration in Spain's finance sector and a possible Greek departure from the 17-member euro area, Rajoy on June 2 added his voice to calls for a more robust "banking union" in Europe, lending his support for a centralized system to re-capitalize lenders. On the same day, Merkel toughened her opposition to euro-area debt sharing, telling members of her party in Berlin that "under no circumstances" would she agree to German-backed euro bonds.
"We need to do whatever we can to convince Germany to show leadership and preserve the European Union as the fantastic object that it used to be," billionaire investor George Soros said in June 2 remarks in Trento, Italy. "The future of Europe depends on it."
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As euro-area unemployment reached its highest level on record, manufacturing output contracted for a 10th straight month in May and the currency plunged close to a two-year low against the U.S. dollar, leaders continued to wrangle over the details of support for the currency bloc. President Barack Obama meanwhile laid the blame for sluggish U.S. employment at the feet of euro-area leaders, saying they haven't done enough to resolve the crisis, now in its third year.
European and Asian stocks fell, with Chinese shares in Hong Kong headed for a bear market. The Stoxx Europe 600 Index slid 0.4 percent at 10:02 a.m. in Frankfurt after the Hong Kong Hang Seng Index dropped 2.3 percent. The euro declined 0.1 percent against the dollar to $1.2418.
Merkel's isolation was underlined yesterday by the new French Finance Minister Pierre Moscovici, who said that aid for troubled European banks should come through the European Stability Mechanism rather than through governments. "We need to go toward a banking union," Moscovici said on RTL radio.
Any request for bank aid must be made by sovereign states, Norbert Barthle, budget spokesman for Merkel's Christian Democrats in parliament, said in a May 29 interview, citing the need for national governments to act as guarantors.
Merkel and Finance Minister Wolfgang Schaeuble have urged Rajoy to accept an international bailout, Der Spiegel magazine reported, without saying where it obtained the information. Spain's El Pais said yesterday that the European Union is also pressing Spain to accept funds, citing unidentified officials in Brussels. Merkel's chief spokesman Steffen Seibert and a Spanish government official declined to comment on the reports.
Cyprus Concerns
Cyprus, the bloc's third-smallest economy, is also increasingly likely to seek a bailout if recapitalization efforts for Cyprus Popular Bank's fail, ECB Governing Council member Panicos Demetriades said yesterday. Greece, Ireland and Portugal have already received assistance.
Yields on German two-year notes fell below zero for the first time ever last week as investors fled riskier sovereign debt. Spanish bonds dropped for a fourth week, pushing the country's 10-year yields above 6.5 percent — nearing the 7 percent threshold which triggered the three earlier bailouts.
Spain plans to sell bonds maturing in 2014, 2016 and 2022 on June 7. The amount hasn't yet been set.
Struggling to shore up confidence in Spain's banking industry, Rajoy urged euro-area nations to "cede more sovereignty" to a central fiscal authority and endorsed the European Commission's call for a banking union that would entail a single regulator and a deposit-guarantee fund.
Such a union, comprising a central rescue fund for lenders and centralized deposit guarantees, would only emerge "at the end of a long path," Bundesbank Vice President Sabine Lautenschlaeger told the June 2 edition of Frankfurter Allgemeine Zeitung.
The shared risk implied by a supranational euro fund "can only be a success in a fiscal union with central controls and intervention rights," Lautenschlaeger told the newspaper.
The chancellor's hard line on debt sharing has been challenged by Italian Prime Minister Mario Monti, who told Greece's To Vima yesterday that euro bonds will occur in some form. Monti will host a meeting with Merkel, Rajoy and French President Francois Hollande in Rome on June 22, ahead of the next EU summit at the end of the month.
Those meetings take place after Greece holds its second election in as many months on June 17, with polls signaling a risk that no party will win an absolute majority. The possibility that a coalition supporting the European bailout package will again fall short has stoked speculation that the country could leave the monetary union and fragment a bloc designed to be unbreakable.
"Europe is having a significant crisis in part because they haven't taken as many of the decisive steps as were needed to deal with the challenge," Obama said in Minneapolis.
Bloomberg News
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