EU fin mins blocked on thorny banking union
LUXEMBOURG -- Europe made little progress Tuesday in its efforts to secure the region's stricken financial system and ensure that failing banks never risk an entire country's economy again when finance ministers from the 27-country European Union failed to agree on how a single banking supervisor should be set up.
A handful of countries made a small breakthrough at a meeting of ministers in Luxembourg, deciding to impose a tax on financial transactions in the hopes of curbing risky, speculative trades and perhaps even creating a fund that could be used to help banks in trouble. The 11 countries that support the tax still have to hammer out exactly how it will work and submit it for approval.
But the ministers were still blocked on larger issues of how the 17 countries that use the euro will move closer together economically and politically _ something they all agree is vital to the future of their currency.
Spain's finance minister, Luis de Guindos, said that only bold action would remove fears for the eurozone and that only once those fears were removed would concerns subside about his own country, which many fear may need a bailout. Spain has been coming under pressure to take up the European Central Bank's offer of buying up a country's bonds to help keep its borrowing costs down. The ECB's offer comes with strict conditions and the Spanish government is working hard to make sure those conditions will not mean further austerity measures. The country has already asked for help for its banks.
De Guindos would not say if his country was preparing to ask for a full bailout, calling the issue "delicate".
"It's logical that if there are doubts about the future of the euro, all those countries that the markets are focused on shows this uncertainty on their spreads," he told reporters, referring to the difference in interest rates charged on a struggling country's bonds and the rate of a more financially secure country such as Germany.
Progress was slow as ministers continued to debate the fine points of how Europe's banks should be supervised and how much help they can be given by the European bailout fund.
Europe is in its third year of its financial crisis, brought on in part by overspending and excessive government debt. Recessions in several countries have worsened the problem, and EU leaders have struggled to solve the twin problems of too much debt and too little growth.
Banks have played a big role in creating the eurozone's financial crisis. The government debt the banks had bought up during the boom times of the eurozone is now no longer considered a safe bet and the banks are struggling to unload it _ usually at hefty losses. Governments have been forced to step in to prop the banks up in many cases. But rescuing banks is expensive and has added to investors' concerns that European countries are simply spending too much.
The challenge now is to break this vicious cycle. Several countries want Europe's new permanent bailout fund _ the European Stability Mechanism _ to have the power to hand money to banks directly, rather than lending it through national governments as it does now.
Leaders have agreed that for that to happen, the ECB must be put in charge as the supervisor of the banks. Many countries are pushing for that to happen by the end of the year. But some countries, like Germany and the Netherlands, are dragging their feet and also quibbling over which banks would be eligible.
"It is clear that the current state is not yet a solution. Work has to continue," said German Finance Minister Wolfgang Schaeuble. "Quality supervision must take priority over an unrealistic timeframe."
But Commissioner Michel Barnier, whose portfolio includes banking, stuck to his original timetable, which is supported by France, notably.
"We want to reach a political decision by the end of the year," Barnier told reporters after the meeting.
His call was echoed by ECB President Mario Draghi who told a European Parliament hearing in Brussels on Tuesday that the region must push ahead with making the bank a common banking supervisor. And he pressed them to go further and create a Europe-wide bailout fund to keep bank failures from wrecking government finances.
The fund would put Europe in a position "where we could afford to let fail an important institution," Draghi said, and avoid losses to taxpayers or the kind of disruption that followed the failure of U.S. investment bank Lehman Brothers in 2008.
"You need to have a common resolution framework, which you don't have now," Draghi said.
Meanwhile, 11 countries agreed to coordinate the implementation of a financial transaction tax: Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain. They still need to work out the details, though the EU Commission has suggested that trades in bonds and shares be taxed at 0.1 percent and trades in derivatives be taxed at 0.01 percent. Other countries could join later if they want to.
It's still unclear exactly how the funds raised would be used, although some supporters of the tax have suggested they could create a security net for banks and help to fund the EU's budget.
France and Germany, which led the charge for the tax, had originally hoped it would be adopted by the whole European Union _ but several countries, like the Britain and the Netherlands, expressed concern about its economic impact.
As was expected, the finance ministers also approved a break for Portugal on its deficit reduction targets. The country, which is funding itself with a (EURO)78 billion bailout _ will reduce its deficit to 4.5 percent next year and 2.5 percent in 2014. It was originally supposed to be under 3 percent by 2013.