European Commission President Jose Manuel Barroso urged the European Central Bank (ECB) to do everything in its power to maintain financial stability in the eurozone, saying the EU faced the biggest challenge in its 50-year history.
Delivering his annual “State of the Union” speech to the European Parliament yesterday, Barroso set out a range of steps the eurozone needs to take to get on top of its 20-month debt crisis, including rapid approval of an agreement struck on July 21 to bolster the European Financial Stability Facility (EFSF) and help recapitalize banks.
He suggested the commission was also looking at ways to increase the firepower of the fund, possibly via some form of leverage, seen by markets as vital if it is to offer protection to large states, such as Italy and Spain.
In a signal that in the short term the ECB, with its unlimited access to liquidity, may be the only European institution capable of staving off the pressure on weaker eurozone states, Barroso called on the central bank to step up.
“We trust that the European Central Bank — in full respect of the [EU] treaty — will do whatever is necessary to ensure the integrity of the euro area and to ensure its financial stability,” he said.
A number of ECB policymakers are unhappy at shouldering a burden they believe is one for governments and Germany’s Juergen Stark resigned earlier this month with sources saying his opposition to the bank’s decision to reactivate its bond-buying program to protect Italy and Spain was his reason for leaving.
At the same time, the eurozone’s 17 member states must sign off on the July 21 deal, which will make the EFSF more flexible and nimble, and accelerate the introduction of the permanent European Stability Mechanism (ESM), he said.
The ESM is due to come into force in July 2013, but Germany and others are keen to bring forward its introduction, possibly by one year.
“The EFSF must immediately be made both stronger and more flexible ... Only then will it be able to deploy precautionary intervention, intervene to support the recapitalization of banks, and intervene in the secondary markets to help avoid contagion,” Barroso said.
Some officials have proposed the 440 billion euros (US$601 billion) in the EFSF could be used as collateral for borrowing, making more money available for crisis fighting. It could also be used to guarantee a first portion of losses on sovereign debt, say 20 percent, which would allow it to be scaled up five times.
However, there is no sign yet of agreement on such measures.
In another hint at possible extra support to the European banking system, Barroso said the commission was considering a wider guarantee mechanism to help banks lend again to the real economy, but he did not elaborate.
Barroso called the region’s crisis, which has spread from Greece to Ireland and Portugal and now threatens Spain, Italy and the wider global economy, a crisis of confidence that had infected finance, economics and society.
“We are confronted by the greatest challenge the European Union has seen in its history,” he said flatly, a statement that would suggest the region’s problems are the worst since the European Economic Community came together in 1958.
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