Just one day after Spain formally requested billions of euros in aid for a banking sector battered by the country’s real estate collapse and on the eve of a crucial summit meeting of European leaders in Brussels,
European authorities unveiled on Tuesday their vision for the future – almost in defiance of the widespread belief that nothing new will come out of the two-day meeting.
The document, released by European Council President Herman Van Rompuy, said greater fiscal union could lead to common debt being issued by eurozone countries. There would also be banking union, with a single European banking regulator and a unified deposit guarantee scheme. It was drawn up after consultations with the presidents of the European Commission, the Eurogroup and the European Central Bank. Mr Van Rompuy said it was "not meant to be a final blueprint", but that he expected "to reach a common understanding amongst us on the way forward" at Thursday and Friday's summit. European Commission President Mr Barroso said the guiding principle was that "greater solidarity and greater responsibility must go hand in hand". Earlier, German Finance Minister Wolfgang Schaeuble also called for there to be a European finance minister, with the power to veto national budgets as well as an elected president of Europe. French, German, Spanish and Italian finance ministers met on Tuesday to discuss closer union. French Finance Minister Pierre Moscovici has said Thursday's EU summit should, "lay the groundwork for the second phase of the euro".
One of the big changes under the new proposals is that while in the past eurozone members had to keep their budget deficits below a certain level, a European treasury will now be able to force them to make changes to their budgets to keep their deficits down.
Manwhile on Monday the financial markets plunged in response to Spain’s formal application for up to €100 billion in aid for its banks because it did not specify exact sums or conditions which are still the subject of negotiation. The Spanish government wants the aid to go directly from the euro zone’s bailout funds to the banks but euro zone rules require that the aid be funnelled through the government in Madrid, which would add to Spain’s sovereign debt.
On Tuesday, Cyprus added to the nervousness about the euro when it told the European authorities that it intends to apply for financial assistance, the fifth eurozone member to do so. It said it needs help to shore up its banks, which are heavily exposed to the Greek economy. A government spokesman, Stefanos Stefanou, said the amount of European aid would be subject to negotiations in the coming days, and that despite the request, the Cypriot government would continue negotiations for a possible loan from a country outside the EU, such as Russia or China. The country has already borrowed €2.5bn euros from Russia, whose business people are important customers of Cyprus's relatively large offshore financial sector which offers low tax rates.
Last Friday, leaders of the eurozone's four biggest nations – Germany, France, Italy and Spain – agreed in principle to measures to boost growth equal to 1% of the currency area's economic output, outlining plans to push for a €130bn package. "We want there to be a significant European growth package," said Italian PM Mario Monti when he appeared at the press conference alongside Spanish PM Mariano Rajoy, German Chancellor Angela Merkel and French President Francois Hollande.
The four met in Rome ahead of an EU summit on the euro crisis next week. The agreement represented a political victory for the recently elected French president who has demanded a growth pact despite strong reservations expressed by his Germany counterpart. However, at the end of less than two hours of talks, they did not reach any agreement on the idea of eurobonds – jointly-backed eurozone government debts used to finance EU government budgets. Mr Monti had warned his EU peers that failure to agree on joint action would encourage market attacks on their economies. He had predicted "progressively greater speculative attacks" without unified action from all the eurozone members.
After the talks, Mr Monti asserted in English that "the euro is here to stay, and we all mean it". French President Francois Hollande, who made agreement of a European growth pact the central plank of his election platform last month, said the four eurozone leaders had "made the prospect for growth much more concrete", asking whether anyone would have imagined a few weeks ago that the idea of growth would be on the agenda of the EU summit.
The French president said the four had also agreed to push for a pan-European tax on financial transactions – also known as a Tobin tax – another of the French President's election pledges. The idea is opposed by the UK government, who says it would hurt the City of London unless the tax were also implemented in other non-European international financial centres, as well as by Sweden.
US backs Spain
At the closing of the XVII Spain United States Forum in New York last week, Secretary of State Hillary Clinton told Crown Prince Felipe that the current situation in Europe “has consequences for the United States because Europe is out biggest trade partner and investor”.
She added: “What happens in Madrid and Barcelona has repercussions in Milwaukee and Ohio.” She said the US supports the steps Spain is taking. It was the end of a four-day working visit by Crown Prince Felipe and Princess Letizia with the object of strengthening business and trade ties between the two countries.