Amid growing international calls for action as a brutal Spain ratings downgrade heightened the eurozone crisis, Merkel held talks in Berlin with British Prime Minister David Cameron.
The two leaders agreed that closer fiscal discipline in the European Union alone was not enough to stem more than two years of turbulence as the clock ticks down for Europe to help stabilise Spain’s banking system.
The EU fiscal pact is “necessary but not the only precondition,” Merkel said, while Cameron, who has opted out of the pact, called it “important but not sufficient” to fight the crisis.
Merkel also said it was “important to stress that we have created instruments for support in the eurozone” and Germany, seen by some EU partners as being inflexible and reluctant to change, backed their use.
With EU leaders seeking an accord at another crunch summit on June 28-29, the crisis took another twist Thursday when Fitch slashed Spain’s credit rating by three notches Thursday, from A to BBB.
Spain’s banks now needed “around 60 billion euros ($75 billion) and as high as 100 billion euros ($125 billion) in a more severe stress scenario,” Fitch Ratings said, more than double its previous estimate for their restructuring costs.
Worse still, Fitch said Spain would likely remain slumped in recession this year and next, rather than stage a mild recovery in 2013.
In Brussels, the head of eurozone finance ministers Jean-Claude Juncker said the bloc would recapitalise Spain’s banks if asked.
“If it came to it and Spain asked for support for its banking sector, that would obviously be done,” Juncker said, while stressing that “as there is no request, it is too early to spend time on figures” for any possible aid.
A ratings downgrade usually makes it more costly for a country to raise fresh funds, compounding problems for Spain which is already being forced to pay more to borrow.
At a 10-year bond sale earlier Thursday, Madrid had to offer investors returns of more than 6.0 percent — a rate widely regarded as unsustainable over the longer term — stoking fears it could follow Greece, Ireland and neighbour Portugal in needing a massive international bailout.
In Lisbon, Portuguese Prime Minister Pedro Passos Coelho spoke of the risk of contagion from Spain’s economic woes “which could affect Portugal and the rest of Europe unless a rapid solution is found,” while voicing confidence that Spain will make the right decisions.
He added that it was “relatively clear” that if Madrid seeks European aid strictly to recapitalise its banks it could receive it.
After Cameron and US President Barack Obama called for an “immediate plan” to resolve the eurozone crisis, Merkel earlier Thursday told German television she saw “more Europe” as the solution.
The chancellor said that in addition to the euro currency used by 17 nations, Europe needed a fiscal union and, above all, a political union, even if that came at the cost of a two-speed approach.
“We need a political union first and foremost. That means we must, step by step, cede responsibilities to Europe,” Merkel told ARD public television.
“But we must not remain immobile because one country or another does not want to follow yet,” she added.
For his part, Juncker said the time had come to tell Europeans, “whether they like it or not,” that integration was inevitable and that leaders were “resolute” in anchoring their shared future in the euro — Greece included.
Bernanke meanwhile told US lawmakers that “the situation in Europe poses significant risks to the US financial system and economy and must be monitored closely.”
That followed phone calls by Obama to Merkel and Italian Prime Minister Mario Monti Wednesday, as Washington appears increasingly anxious the turmoil could escalate and threaten both the US recovery and Obama’s re-election hopes.
Merkel also sought to play down expectations of the June 28-29 meeting, telling ARD she did not believe “that one summit is capable of settling everything in one fell swoop.”
She later said, at a podium discussion with students in Berlin, alongside Cameron and Norway’s Prime Minister Jens Stoltenberg, that there was no such thing as a magic solution to the euro crisis.