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The requests by Spain and Cyprus for bailouts from the European Union on Monday have rubbed salt into the wound of the eurozone crisis and made decisive action at the EU leaders' summit in Brussels even more urgent.
Spain's financial crisis is driven by a major commercial bank, Bankia, which, on top of earlier state aid of $5.7 billion, requested $23.7 billion in new emergency capital. But Moody's downgraded 28 Spanish banks on Monday.
Spain wants the bailout funds to go directly to its ailing banks, however eurozone rules require that they be funneled through Madrid, which would add to Spain's sovereign debt.
Hard on the heels of Spain, Cyprus became the fifth eurozone member to request a bailout. Heavily exposed to debt-ridden Greece, Cyprus' banks may need as much as $12.5 billion to stay solvent. In all, the outstanding loans of Cyprus' banks are estimated to be eight times Cyprus' GDP.
The ongoing euro crisis will further hinder the global recovery unless a viable solution can be worked out.
But finding a solution will not be easy. The crux of the problem is obvious - the present euro system is not working. Member states would have to give up some of their autonomy to make the euro succeed, but many are simply not ready to compromise their sovereignty.
So all eyes were fixed on the Wednesday meeting of the leaders of Germany and France ahead of the summit on Thursday.
German Chancellor Angela Merkel has refused to yield to demands for pooling eurozone debt in the form of eurobonds, or allowing bailout funds to help stricken banks. Instead, she wants to give more powers to the European Commission in Brussels through treaty changes over the next five to 10 years, in an effort to remake the eurozone's economy after Germany's.
French President Francois Hollande, on the other hand, is unwilling to relinquish sovereignty to Germany. They favor rapid moves to provide financial aid. Under pressure from all sides, both within Europe and from the United States and the Asia-Pacific, the EU must act fast to contain the euro contagion. As German Foreign Minister Guido Westerwelle rightly pointed out, this will be a decisive week for Europe.
(China Daily 06/28/2012 page8)