EUROPEAN Commission President Jose Manuel Barroso yesterday said the bloc was facing the greatest challenge in the history of the union and he urged the European Central Bank (ECB) to do everything in its power to maintain financial stability in the euro zone,
In his ‘State of the Union’ address before the European parliament, Barroso said: “The financial, economic and social crisis has resulted in a crisis of confidence and trust not seen in decades”, a statement that would suggest the region’s problems are the worst since the European Economic Community came together in 1958.
Barroso called the region’s crisis, which has spread from Greece to Ireland and Portugal and now threatens Spain, Italy and the global economy, a crisis of confidence that had infected finance, economics and society.
There was a lack of confidence and trust in governments, in leaders and in Europe and “in our ability to change things for the better”, he said.
“The roots of this crisis are clear: we have given in to the temptation of living beyond our means. We have let financial markets develop in unsustainable ways. We have not addressed imbalances between our member states,” the Commission President said.
“We have taken our position in the world for granted. We have not maintained Europe’s competitiveness in the world. The result is deep concern in our societies. Fear among our citizens. The temptation of national retrenchment as people turn inwards. Populist responses are putting into question the Union’s greatest achievements – the euro, the single market, even the free movement of people. The crisis has moved beyond the financial, economic and social dimension. The essential questions are now political: Are we a Union? Do we behave like one?”
To bring back confidence and trust, Barroso said a Union of stability and responsibility must be built.
“To achieve it we need to act collectively, decisively – now. It is about political will. It is the test for this generation of political leaders,” he said.
“The economy can only remain strong if it delivers growth and jobs. We must unleash the energy of our economy, in particular of the real economy. The forecasts today point to a strong slowdown. But, significant growth in Europe is not the impossible dream. We have done it before. We must do it again. It is true that we do not have much room for a new fiscal stimulus. But that does not mean that we cannot do more to promote growth.”
He added: “Right now we need to give concrete hope to the one in five of our young people who cannot find work. In some countries, their situation is simply dramatic.”
Barroso set out a range of steps the euro zone needed to get on top of its 20-month debt crisis, including rapid approval of an agreement struck on July 21 to bolster the EFSF bailout fund and help recapitalise 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 euro zone 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. Germany’s Juergen Stark resigned this month, with sources saying his opposition to the ECB’s decision to reactivate its bond-buying programme to protect Italy and Spain was the reason for leaving.
At the same time, the euro zone’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 crisis resolution mechanism, the ESM, Barroso said.
The ESM is scheduled 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 recapitalisation of banks, and intervene in the secondary markets to help avoid contagion,” he said.
“Once the EFSF is ratified, we should make the most efficient use of its financial envelope. The Commission is working on options to this end.”
Some policymakers have proposed the 440 billion euros 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 per cent, which would allow it to be scaled up five times.
But 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.
In other initiatives put forward in the speech, which Barroso has adopted as a way of weighing up the direction of the EU in much the same way the US president does in his State of the Union address to Congress, the Commission president advocated tighter financial regulation.
There are already measures to impose tighter controls on derivatives trading, naked short-selling and bankers’ pay. Barroso said proposals would be delivered by the end of the year to crack down on ratings agencies, and said work was continuing on a tax on financial transactions.
And he promised that the Commission would in the coming weeks present a proposal for a “single, coherent” way of deepening economic coordination in Europe, building on new, tighter budgetary rules known as the ‘six pack’, which were approved by the parliament yesterday after months of delay.
