The European Commission’s top economic official, Olli Rehn, warned that the single currency area could disintegrate without stronger crisis-fighting mechanisms and tough fiscal discipline. The twin warnings came as worries about Spain’s banks and Greece’s survival in the euro area pushed the euro to a two-year low against the dollar and hastened a rush into safe-haven assets such as Austrian and French bonds, whose 10-year yields hit a euro-era low. Spaniards alarmed by the dire state of their banks moved more money abroad in March faster than at any time since records began in 1990, official figures showed.
The 66.2 billion euros ($82.0 billion) net capital flight occurred before the nationalization of Spain’s fourth biggest lender, Bankia, in May due to massive losses from a burst property bubble. Irish voters seemed set to approve in a referendum a European budget discipline treaty vital to continue receiving EU aid. But the outcome of a second Greek general election on June 17, seen as crucial for Athens’ future in the currency zone, is too close to call. ECB President Mario Draghi urged Europe’s leaders to clarify their vision for the single currency quickly, warning the European Parliament that the central bank could not fill the policy vacuum. “We will avoid bank runs from solvent banks. Depositors’ money will be protected if we build this European guaranteed deposit fund. This will assure that depositors will be protected,” Draghi said, calling for an EU-wide banking supervision and resolution system.
EU paymaster Germany, reluctant to risk more of its own taxpayers’ money in support of euro zone partners, has so far rejected any such joint deposit guarantee. Chancellor Angela Merkel refrained from comment on calls for a banking union but said Europe should be ready to consider all options to stem its sovereign debt crisis.
“There are integration steps which will require treaty changes. We are not at that stage today but nevertheless there are no taboos,” she told a news conference in the Baltic town of Stralsund.
Another top ECB official, executive board member Joerg Asmussen, said in Frankfurt that the 25 or so most important banks in the euro area should be supervised by a supranational watchdog rather than just national authorities. Draghi, testifying before EU lawmakers, said the financial crisis had “heightened risk aversion in a dramatic way. “I urge all governments to keep this in mind, because it is better to err by too much in the very beginning rather than by too little,” he said, citing the repeated failure of national regulators to correctly assess the needs of failed Franco-Belgian bank Dexia and Spain’s Bankia.
EDIFICE AT RISK: Another ECB policymaker, Bank of Italy governor Ignazio Visco, went further, saying political inertia and bad economic decisions had put “the entire European edifice” at risk and only a clear path to political union could save the euro. “There are now growing doubts among international investors about governments’ cohesion in guiding the reform of European governance and even their ability to ensure the survival of the single currency,” Visco told the Bank of Italy’s annual meeting.
