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 Saturday 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.
As euro-area unemployment reached its highest level on record, manufacturing output last month contracted for a 10th straight month and the currency plunged close to a two-year low against the US dollar, leaders continued to wrangle over the details of support for the currency bloc.
Merkel’s isolation was underlined on Sunday by 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,” he 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 German 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 on Sunday that the EU 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, the bloc’s third-smallest economy, is also increasingly likely to seek a bailout if recapitalization efforts for Cyprus Popular Bank fail, European Central Bank Governing Council member Panicos Demetriades said on Sunday. Greece, Ireland and Portugal have already received assistance.
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 endorse 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 Frankfurter Allgemeine Zeitung on Saturday.
The shared risk implied by a supranational euro fund “can only be a success in a fiscal union with central controls and intervention rights,” she told the newspaper.
Merkel’s hard line on debt sharing has been challenged by Italian Prime Minister Mario Monti, who told Greece’s To Vima newspaper on Sunday that euro bonds would occur in some form.