As Euro Problems Fester, ECB Eyes A More Perfect Economic Union

From The Washington Post

By   and Published: June 4

 

Euro-zone leaders aim to get control of debt crisis: Amid protests throughout the continent against strict austerity measures, European leaders are working on plans to save the euro.

European leaders are considering ways to bring banks and government budgets under central control in hopes of putting the region’s two-year-old financial crisis to rest.

Under pressure from the European Central Bank and global investors, the leaders are expected to present their plans at a summit this month. The meeting could represent a turning point as the 17 nations of the euro currency union try to knit themselves together in a more coherent fashion.

The ECB, with its virtually unlimited ability to print money and ease the financial pressure on indebted nations, has been using that power as leverage in pushing the leaders of individual countries to accept an increasingly regional approach to economic challenges. On the table are specific proposals that would overturn the way European governments have long handled their financial affairs.

 

There have been growing calls for the ECB to use its considerable arsenal more aggressively. Some financial and political analysts say a grand bargain may be in the works: In return for major steps by euro-zone members toward economic federalism, the ECB could buttress struggling countries such as Spain and Italy.

 

The ECB is widely considered the one institution that could quickly put a stop to the accelerating euro crisis and head off a possible breakup of the currency union.

 

But instead of offering a quick fix, the ECB has parceled out its help only at critical moments, letting market tensions rise until it can extract concessions from Europe’s elected leaders that are aimed at better financial management. The bank’s willingness to stand aside — and risk further escalation of the financial turmoil — has become a defining feature of the

crisis.

 

With Spain’s economy teetering and concern mounting that Greece may exit the euro zone after national elections this month, European leaders have been under increasing pressure to take significant newsteps. These include proposals to regulate financial firms at the European level, offer regional support for weakened banks and issue bonds backed by all euro-zone governments.

 

‘Heightened’ urgency

 

On Monday, German Chancellor Angela Merkel offered her most explicit endorsement of some of the proposals. These include establishing a central regulator for European banks, whose oversight has been a jealously guarded — but arguably mishandled — national prerogative.

A financial collapse in Spain poses a profound threat to the U.S. and global economies because it could deepen Europe’s recession, cause a new American downturn and prompt banks worldwide to shut down lending, as happened after the collapse of the Wall Street bank Lehman Brothers in 2008.

 

These renewed dangers have touched off a familiar dynamic. The ECB and Germany, the region’s economic powerhouse, are withholding help while pushing European countries to make concessions aimed at reining in government deficits and debt. Much of Europe — and the world — is pressing for faster action to support struggling governments.

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