The European Commission has offered Spain a vital lifeline amidst rumours of growing uncertainty over the struggling nation’s banks and debts.
The EU economic and monetary affairs Commissioner Olli Rehn said that Brussels was prepared to give Spain an extra year to bring down its spiralling deficit. The country must reach the EU limit of 3% of GDP. However, the offer only stands if the Spanish government can provide a solid two-year budget plan, something that Madrid has vowed to do. They must also limit the rates of overspending by its autonomous regions and make further reforms to the financial sector.
Rehn added that there was no chance of Italy being offered a similar concession to help balance its budget. He pointed out, that unlike Spain; Italy’s economy is forecast to start growing again by next year.
The Commissions President Jose Manuel Barroso called for tighter fiscal integration in the Eurozone, saying that such a merger could include a joint bank deposit guarantee scheme to prevent bank runs and euro financial supervision. He believes that attitudes will have changed since member states unanimously rejected the idea only months ago.
An economic policy document released yesterday laid out some dramatic policy proposals which analysts say are needed to tackle the debt crisis, the European Union’s executive arm said the vicious circle of weak banks and heavily indebted states lending to each other must be broken and called for a banking union in the euro zone.
“In the same vein, to sever the link between banks and the sovereigns, direct recapitalisation by the ESM (European Stability Mechanism) might be envisaged,” the report said.
Permitting the ESM to lend directly to banks would require a change to a treaty in the midst of ratification by member states that might come too late for Spain’s needs. Spanish premier Mariano Rajoy backs the idea but Rehn appeared cool to it.
“Direct disbursements to banks are not foreseen as such in the treaty, and therefore this is not an available option … in terms of direct recapitalisation,” Rehn told reporters.
The proposal is an idea that appears to have very little hope of coming to fruition. Germany, the EU’s main provider of cash is firmly opposed to any joint European banking system and the use of bailout funds without a country having to go through a politically embarrassing IMF/EU austerity regime.
The combination of the Spanish crisis and the train wreck of the Greek economy saw investors flee the Euro yesterday but saw it balance out today against the Pound at the 80pence level. The Irish hit the polls today to vote on the fiscal pact and many investors are cautious about the result. Uncertainty remains to be rife in the Eurozone, the latest opinion polls from Greece show varying results with some indicating a win for the pro austerity party New Democracy and others a win for the anti-austerity party Syriza.
The Pound to Euro exchange rate is currently trading at 1.249
The Pound to US Dollar exchange rate is currently trading at 1.552
The Euro to US Dollar exchange rate is currently trading at 1.271
The Euro to Pound exchange rate is currently trading at 0.800
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