Part of the solution lies in “correct and transparent risk recognition” instead of putting off the reckoning, the commission said. In the wake of the European Central Bank’s unprecedented 1 trillion euros in long-term loans, some banks are still using the funds to buy sovereign bonds, binding them more closely to financially shaky governments, the commission said.
The central bank’s “accommodative” monetary policy with interest rates at 1 percent limits its scope for spurring the economy, the commission said. It estimated on May 11 that the euro economy will contract 0.3 percent in 2012.
The debt crisis contributed to a greater-than-expected slump in economic confidence in the euro area in May, data showed today. The commission’s index of executive and consumer sentiment fell to 90.6, the lowest since October 2009, from a revised 92.9 in April.
In an assessment by staff economists, the commission said there is little room for deficit-plagued countries to push back planned savings to a later date. Such an easing-up would be punished by markets, it said.
“Member states which face high and potentially rising risk premia do not have much room for maneuver to deviate from their nominal fiscal targets, even if macroeconomic conditions turn out worse than expected,” according to the document.
Still, Economic and Monetary Commissioner Olli Rehn said Spain might be granted an extra year, until 2014, to bring its deficit down to the limit of 3 percent of gross domestic product.
The commission would only make that concession if Spanish Prime Minister Mariano Rajoy’s government delivers a “solid, two-year budget plan for 2013 and 2014,” Rehn told reporters.
The commission, which gained new powers to police national budgets in response to the crisis, is trying to crack down on deficits without imposing policies that crimp the economy.
“Credibility of consolidation is one of the key factors,” it said.
The commission kept alive the debate over common borrowing by euro-area governments, already rejected by Merkel as at best a goal for the long term and not a way out of the current turmoil.
Debate over euro bonds flared at last week’s summit of European leaders, the first for French President Francois Hollande after he took office vowing to challenge the German- dominated budget-cutting creed that has marked the crisis response.
Ideas include a debt-redemption fund proposed by Germany’s council of economic advisers and different types of “stability bonds” sketched out by the commission last year. The commission is now working on more concrete proposals.
Passage of a deficit-limitation treaty and the adoption of two laws that further enhance central oversight of national budgets will help pave the way toward common bond sales, the commission said.
“The successful application of the new economic governance framework already in force and in the process of being put in place may be a significant step towards fulfilling the preconditions for common issuance,” the commission said.
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