German Chancellor Angela Merkel pushed for a stronger European political union on Thursday amid growing international calls for action as a brutal Spain ratings downgrade added another twist to the eurozone crisis.
US Federal Reserve Chairman Ben Bernanke became the latest to sound the alarm over the European crisis, as Merkel held talks in Berlin with British Prime Minister David Cameron.
The two leaders agreed that closer fiscal discipline in the EU alone was not enough to stem more than two years of turbulence as the clock ticks down for Europe to help stabilize Spain’s banking system.
The EU fiscal pact is “necessary, but not the only precondition,” Merkel said, while Cameron, who has opted out of the pact, called it “important, but not sufficient” to fight the crisis.
Merkel also said it was “important to stress that we have created instruments for support in the eurozone” and Germany, seen by some EU partners as being inflexible and reluctant to change, backed their use.
With EU leaders seeking an accord at another summit on June 28 and June 29, the crisis took -another twist on Thursday when Fitch slashed Spain’s credit rating by three notches from “A” to “BBB.”
Spain’s banks now needed “about 60 billion euros (US$75 billion) and as high as 100 billion euros in a more severe stress scenario,” Fitch Ratings said, more than double its previous estimate of restructuring costs.
Worse still, Fitch said Spain would likely remain in recession this year and next, rather than stage a mild recovery next year.
In Brussels, eurozone finance ministers head Jean-Claude Juncker said the bloc would recapitalize Spain’s banks if asked.
“If it came to it and Spain asked for support for its banking sector, that would obviously be done,” Juncker said, while stressing that “as there is no request, it is too early to spend time on figures” for any possible aid.
A ratings downgrade usually makes it more costly for a country to raise fresh funds, compounding problems for Spain, which is already being forced to pay more to borrow.
At a 10-year bond sale earlier on Thursday, Madrid had to offer investors returns of more than 6 percent — a rate widely regarded as unsustainable over the longer term — stoking fears it could follow Greece, Ireland and Portugal in needing a massive international bailout.
After Cameron and US President Barack Obama called for an “immediate plan” to resolve the eurozone crisis, Merkel earlier on Thursday told German television she saw “more Europe” as the solution.
The chancellor said that in addition to the euro currency used by 17 nations, Europe needed a fiscal union and, above all, a political union, even if that came at the cost of a two-speed approach.
“We need a political union first and foremost. That means we must, step by step, cede responsibilities to Europe,” Merkel told ARD public television. “But we must not remain immobile because one country or another does not want to follow yet.”
Juncker said the time had come to tell Europeans, “whether they like it or not,” that integration was inevitable and that leaders were “resolute” in anchoring their shared future in the euro — Greece included.
Meanwhile, Bernanke told US lawmakers that “the situation in Europe poses significant risks to the US financial system and economy and must be monitored closely.”