Strasbourg, France: European Commission president Jose Manuel Barroso urged the European Central Bank (ECB) to do everything in its power to maintain financial stability in the euro zone on Wednesday, saying the EU faced the biggest challenge in its 50-year history.
Delivering his annual “State of the Union” speech to the European Parliament, Barroso set out a range of steps the euro zone needed to take get on top of the 20-month debt crisis, including rapid approval of an agreement struck on 21 July to bolster the EFSF bailout fund and help recapitalise banks.
European Commission president Jose Manuel Barroso addresses the European Parliament during a debate on the state of the EU in Strasbourg. Photo: Reuters
He suggested that the commission was also looking at ways to increase the firepower of the fund, seen by markets as vital if it is to offer protection to large states such as Italy and Spain.
And 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, he called on the central bank to play its part.
“We trust that the ECB -- 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.
At the same time, he said the euro zone’s 17 member states needed to sign off on the 21 July deal, which will make the EFSF more flexible and nimble, and accelerate the introduction of the permanent crisis resolution mechanism, the ESM.
“The EFSF must immediately be made both stronger and more flexible... Only then will it be able to deploy precautionary intervention, (be able to) 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 in the bailout fund could be used as collateral for borrowing, making more money available for crisis fighting.
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 to July 2012.
German Bund futures, seen as a safe haven from the crisis, fell from a session high after the speech, partly in reaction to Barroso raising the possibility of a wider lending mechanism to support Greek banks, a proposal that he did not elaborate on.
The euro traded marginally stronger at 1.3609 to the dollar.
Barroso called the debt crisis, which has spread from Greece to Ireland and Portugal and now threatens Spain and Italy and the wider global economy, a crisis of confidence that had infected finance, economics and society.
“We are confronted by the greatest challenge the European Union has seen in its history,” he said flatly, a statement that would suggest the region’s problems are the worst since the European Economic Community came together in 1958.
The European Parliament has been among the biggest advocates of the introduction of euro area bonds -- sovereign debt jointly underwritten by all 17 euro zone members -- as a way of tackling the crisis.
The European Commission has promised to present proposals for such bonds in the coming weeks, and Barroso underlined that intention, but he nuanced it on Wednesday, saying the bonds should be called “stability bonds” rather than “euro bonds”.
He also said they should only be considered once there was far deeper economic integration among the region’s states.
“Once the euro area is fully equipped with the instruments necessary to ensure both integration and discipline, the issuance of joint debt will be seen as a natural and advantageous step for all,” he said.
“On condition that such euro bonds will be ‘stability bonds´: bonds that are designed in a way that rewards those who play by the rules, and deters those who don’t.”
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 way the US President does in his State of the Union address to Congress each year, the commission president also advocated tighter financial regulation.
There are already plans in place 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.
“In the last three years, member states have granted aid and provided guarantees of €4.6 trillion to the financial sector. It is time for the financial sector to make a contribution back to society,” he said, adding that such a tax could raise as much as €55 billion a year.