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Strasbourg - European Commission president Jose Manuel
Barroso urged the European Central Bank (ECB) to do everything in its power to
maintain financial stability in the eurozone on Wednesday, saying the European Union faces
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 eurozone
needed to take get on top of the 20-month debt crisis, including rapid approval
of an agreement struck on July 21 to bolster the European Financial Stability Facility (EFSF) bailout fund and help
recapitalise banks.
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 eurozone states, he called on the central
bank to play its part.
“We trust that the European Central Bank - 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 eurozone’s 17 member states
needed to sign off on the July 21 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 €440bn 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 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 eurozone 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 rating 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 €55bn a year.
