European Hail Mary or End Run?

The call for direct capitalization of Euro zone banks by forming a banking union is definitely a hail Mary to save Spanish and Greek banks. Although this is only a “call”, Germany will never support it and at some point, Europe will implode economically. When? Based on this recommendation for a banking union, it is very close. If for some reason, Merkel is able to do an end run of the Bundestag and an European banking union is formed, it will be the precursor of the New World Order.

David DeGerolamo

EU calls for banking union, direct recapitalization of banks

The euro zone should move to a banking union and consider directly recapitalizing banks from its permanent bailout fund, the European Commission said on Wednesday in annual economic recommendations that shone a critical light on Spain.

The call, in documents outlining the economic strategy for the euro zone, would appear to directly address market concerns about problems in the Spanish banking sector and the cost to the Spanish government of rescuing its banks – a factor that has driven Spain’s borrowing costs to near unsustainable levels.

European stock markets pared losses and the euro jumped on the back of the recommendations, even though they are not formal proposals, face serious opposition from some member states and remain a long way from implementation.

Investors are worried that public finances in Spain, which is already struggling to cut it large budget deficit at a time of recession, will become unsustainable if it is forced to bail out is banks, after a real-estate market boom turned to collapse and left nearly all banks laden with bad property loans.

The Commission, the European Union’s executive, said the vicious circle of weak banks and indebted sovereigns lending to each other needed be broken.

“A closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a “banking union”, would be an important complement to the current structure” of Europe’s economic and monetary union, the Commission said.

“In the same vein, to sever the link between banks and the sovereigns, direct recapitalization by the ESM might be envisaged,” the document said.

The euro zone’s permanent bailout fund, the European Stability Mechanism (ESM), which comes into force in July, cannot as it stands lend directly to banks, only to sovereigns, even if only for the specific purpose of bank recapitalization.

To change that, euro zone countries would have to change the treaty on which the ESM is based and which some euro zone countries have already ratified. Time is running short to do that, especially with the rapidly mounting problems in Spain.

Germany also strongly opposes allowing the ESM to directly recapitalize banks — an option Spain wants.


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