EU Calls for "Banking Union" to Ease Eurozone Debt Crisis

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Blame the tumultuous tumble in equities Wednesday on Europe.

World markets were shaken as worries over the Eurozone debt crisis, in particular the Spanish banking system, again rattled investor confidence.

The Dow Jones was down 160 points, the S&P 500 fell 19 and the Nasdaq lost 34.

Sending shivers through markets Wednesday was a statement from the European Central Bank (ECB) saying it had not been consulted on the bailout for Spain's No.4 bank Bankia, and that such a recapitalization could not be provided by the Eurosystem. Spanish lender Bankia announced last week it needs $23.8 billion in state aid.

Also weighing on markets was Spain's debt downgrade late Tuesday by independent ratings agency Egan Jones. The move sparked more questions about the ailing country's ability to fund bank bailouts that could balloon to some 100 billion euro.

A number of other Spanish banks have recently been downgraded by various rating agencies. The woes hanging over Spain and its sickly banking system shoved the euro down to a near two-year low Wednesday of around $1.24.

"I believe that the markets have not yet fully priced in a Greek exit, nor the full implications of a Spanish default – both of which remain distinct possibilities in my mind," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Until they do, expect trading to be an unholy mess of rallies driven by hopes for further bailouts, and short, sharp declines driven by the absence of the same."

Now the EU has a new bailout plan.

The EU Banking Union

The EU's executive board has called for a "banking union" to unify efforts to deal with the area's financial chaos, notably in Spain, which is plagued by high unemployment–nearly half of the country youth are unemployed–and severe debt. The proposal also pushes for financial supervision and deposit guarantees across the 17-nation Eurozone.

According to Jose Manuel Barroso, president of the European Commission, it is "an ambitious approach."

Barroso said Wednesday, "We intend to look at the further steps we need to take towards a full economic union to complete our monetary union. It is very important for all the European citizens to understand this: There is no magic bullet, there is not going to be miracle solution, these issues take time and they require sustained effort and coherence."

The region's instability makes the idea of a banking union seem promising. Such an oversight could better supervise, and if needed, rescue the Eurozone's 17 member nations compared to the present uncoordinated medley of national regulators.

Barroso added, "In some areas we have made good progress – I can say the medicine is beginning to work. But we are not there yet in terms of our goals, so we now need to redouble our efforts, at both the national and European levels. We need to move further and faster."

Eurozone Debt Crisis: Spain's Bailout

Also recommended Wednesday was to give Spain until 2014, an additional year, to meet its fiscal targets. The commission proposed that the ailing country reform its banking sector, boost its retirement age sooner to help older workers re-enter the job market and quickly sift through the quagmire of regulation that hinders business ventures.

But Spain's efforts – especially its bank bailout plans – might not resolve anything.

"Spain's strategy is nothing more than "delay and pray,'" said Fitz-Gerald. "The only reason Spanish banks are not yet bankrupt is that they are extending new loans to debtors that are being used to pay interest and principle on existing debt that's coming due. This creates the illusion that they're still viable businesses when everybody knows they're not."

Fears are mounting that Spain may be on course for an international bailout. If that scenario comes to fruition, it would join Ireland, Portugal, and Greece, whose June elections could establish whether the financially stressed Mediterranean county exits the euro and returns to its drachma.

The depressed economic state is not limited to the PIIGS (Portugal, Ireland, Italy, Greece and Spain). An assessment of 12 member states Wednesday by the European Commission revealed the whole lot, including France and the U.K., are tormented with macroeconomic imbalances.

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