Spain, Portugal urge eurozone to unfreeze credit, speed up banking union

The leaders of Spain and Portugal on Monday demanded that the 17-nation eurozone speed up efforts to create a banking union and complained that credit is frozen in their countries, preventing economic growth and crucial job creation.

But Germany calls for more cautious approach to creating central authority for rescuing banks

Spainish Prime Minister Mariano Rajoy, foreground and Portugal's prime pinister, Pedro Passos Coelho, review troops during a welcome ceremony prior to a meeting at the Moncloa Palace in Madrid on Monday. (Andres Kudacki/Associated Press)

The leaders of Spain and Portugal on Monday demanded that the 17-nation eurozone speed up efforts to create a banking union and complained that credit is frozen in their countries, preventing economic growth and crucial job creation.

Many banks are lending at relatively high rates because they are worried about the weak economy. Those higher borrowing rates are making it difficult for households and companies to spend and invest.

"The money from the banking system isn't getting to the businesses or into the economy," Portugal's prime minister, Pedro Passos Coelho, said after meeting with Spanish Prime Minister Mariano Rajoy.

Investment will create jobs: Portuguese PM

Their bilateral government summit in Madrid came as European finance ministers were gathering in Brussels to discuss the continent's financial crisis.

Both Rajoy and Passos Coelho called on the European Union to move swiftly to create a regional banking union and to slow down budget cuts to help the economy grow.

"Investment is the only way to create jobs," Passos Coelho said. "If there's no financing, it'll be very hard for companies to grow and build up their business."

Spain has been in recession for most of the past four years and has a record 27.2 per cent unemployment rate. Portugal, with a 17.7 per cent jobless rate, is one of four eurozone countries to have received a sovereign bailout.

Both leaders said that more must also be done to reduce the crushing unemployment rates, which are particularly high for young people.

Germany calls for cautious approach to banking union

But on the same day that the two leaders urged their eurozone partners to move more quickly toward a banking union, Germany's finance minister, Wolfgang Schaeuble, called for caution when creating a central authority with the power to rescue failing banks, suggesting the European Union would lose credibility if it rushed the plans

A majority of the 17 countries in the 27-country bloc's common euro currency union want to create a central banking regulator and an authority that can rescue or unwind ailing banks. Setting up the two bodies is key to building a Europe-wide "banking union" designed to stabilize the region's financial system.

Berlin, however, argues that setting up the bank rescue authority would require changing EU treaties — a potentially cumbersome and time-consuming process.

"We should not make promises we cannot keep," Schaeuble wrote in Monday's Financial Times, proposing that Europe should at first rely on co-operation between national agencies.

That risks stirring impatience among others in Europe, who advocate moving as fast as possible in establishing the banking union to stabilize the 17-nation eurozone's financial system after more than three years of the debt crisis.

Schaeuble's French counterpart, Pierre Moscovici, called for quick progress to establish "a real integrated resolution authority."

Rescue of banks increased debt levels

Europe's banking industry has been one of the main causes of the eurozone's financial crisis. Governments in countries such as Spain and Ireland had to step in to rescue their banks, which had been brought close to collapse by toxic property investments. These rescue attempts caused the governments' debt levels to increase to dangerously high levels.

Schaeuble wrote Monday that Germany will assess "with an open mind" a proposal to be presented next month by the European Commission, the EU's executive arm, for the creation of a mechanism to deal with failing banks. He warned that existing EU treaties "do not suffice to anchor beyond doubt a new and strong central resolution authority."

The minister argued that when a bank is wound up, money and jobs are usually lost, prompting those affected to seek redress — meaning that a new European authority would need a solid legal base.

"Amending the treaties takes time," he wrote. "Luckily, the alternative is not between a legally shaky resolution authority now and the postponement of repair work on the banks."

Schaeuble said Europe can't "rely on ad hoc approaches until 2018," as foreseen by a draft EU plan, but also suggested Europe could hurt itself by setting an unrealistic timetable for the union. Initial predictions that a single European banking supervisor — another core part of the banking union — would start work at the beginning of this year "cost the EU credibility," he wrote.

The supervisor is now expected to start work in the middle of next year.

Germany pushes for national banking bailout agencies

Schaeuble said a mechanism to make decisions on winding up banks, based on a network of national authorities, could start work once a European banking supervisor is operating. He said it would rely on national funds instead of a single European resolution fund, "which the industry would take many years to fill."

The drawback of that solution would be that it fails to achieve what was touted as one of the banking union's most important goals — pooling the financial sector's risk at a European level, shielding weak governments from being dragged down by some failing banks in their country.

Schaeuble acknowledged that the result of his approach "would be a timber-framed, not a steel-framed, banking union," but that, he argued, would buy time to create the legal basis for a more ambitious project.

It remains to be seen how much support Germany will get for its position elsewhere in Europe, where many would like to move faster on creating the banking union.

France's Moscovici said as he arrived at a meeting of eurozone finance ministers in Brussels that Europe "must go as far as possible" within existing treaties and then look at what might require legal changes.

"Our belief is that we can go very far and that we must go very quickly," he said.

The Netherlands' Jeroen Dijsselbloem, who chairs the eurozone finance ministers' meetings, said that "the Germans are putting forward understandable questions, which will have to be dealt with on the way forward."

"But I don't see why that should retain us from making progress on the banking union," he said.