May 7, 2012
As concerns about Spanish banks grow, leading economists are warning that Europe's banking system urgently needs to be overhauled, otherwise the entire monetary union could be in jeopardy. The continent's leaders missed their chance to reform the system in the wake of the 2008 financial crisis, and are now paying the price.
It was one of those puzzling sentences that central bankers like to leave hanging in the air. The temporary European Financial Stability Facility (EFSF), the rescue fund for cash-strapped euro-zone countries, has not been very successful, admitted European Central Bank (ECB) President Mario Draghi at a press conference in Barcelona last Thursday. "Its functioning fell short of both expectations and needs," he said.
Draghi left it up to the journalists in the audience to interpret what is wrong with the fund and what needs to be changed. Furthermore, the Italian banker failed to mention that his organization has long been exploring ways of expanding the scope of the EFSF, or its permanent successor, the European Stability Mechanism (ESM), to give the bailout mechanism more firepower.
Euro Group chief Jean-Claude Juncker had asked Draghi for his advice in the matter two weeks earlier. Originally, the ESM, which will be launched in July 2012, was only intended to help out debt-ridden governments, which would have to meet strict requirements in return. But recently, there have been serious closed-door discussions about direct aid for banks. In Brussels, a working group is also looking at this delicate subject.
Time is running out. With the financial crisis now in its fifth year, the banks' problems remain unresolved, and in some countries they are even jeopardizing the stability of the state -- and the future of the European common currency.
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