Several painful years still ahead for euro zone, warns Merkel
GERMAN Chancellor Angela Merkel has rejected suggestions the worst was over for the euro zone, saying the EU faces years of painful reforms, slow growth and high unemployment.
At the end of a two-day summit of EU leaders in Brussels, Merkel hailed agreements on banking supervision and the release of aid to Greece, but was cautious about predicting better times ahead.
"One reason I am careful with my forecasts is the adjustment process, the changes that we are going through are very difficult and painful," Merkel said.
She said the bloc would not see the fruits of labour market and other structural reforms for several years, with 2013 shaping up as another challenge.
"Next year, and the ECB president said this, we will have very low growth rates, we will see negative growth in some countries, and we can expect very high unemployment levels to continue," Merkel said.
"On the one hand we have accomplished a lot. But we also have tough times ahead of us that can't be solved with one big step. There has been lots of talk about the one step, whether it be a debt haircut, euro bonds or some other measure that will solve everything. That won't be the case."
Earlier, the European Central Bank warned there was no room for complacency following early signs of easing strains on financial markets.
It urged governments to push ahead with reforms after it was granted powers yesterday to supervise banks Europe-wide.
Putting the ECB in charge of supervising euro zone banks and possibly others from the European Union is important to make the bloc's institutions more crisis resilient, but more needs to be done to avoid a renewed crisis flare-up, it said.
"The situation is still very fragile in many ways," ECB Vice-President Vitor Constancio said at a presentation of the bank's twice-annual Financial Stability Review.
"Key financial stability risks remain and there is no room for complacency," the ECB said in the report.
The main risks are a possible renewed intensification of the crisis if governments fall behind on their reforms, a deterioration of banks' health and further funding strains as money and debt markets are still not functioning properly.
The banking union - a three-part process which involves creating a single supervisor, establishing a fund to wind down problem banks and fully coordinating national schemes that guarantee deposits - is seen as key to address such risks.
Following months of negotiations, EU finance ministers agreed yesterday to hand the ECB authority to police directly at least 150 of the euro zone's biggest banks and to intervene in smaller banks at the first sign of trouble.
"Those 150 banks represent 85pc of total assets in the euro area ... which I would say is more than enough," Constancio said, adding that the single supervisory mechanism had legal competence over all euro zone banks.
The next step is to establish a fund to wind down troubled banks, which Constancio said should be modelled on the U.S. Federal Deposit Insurance Corporation (FDIC).
"This is not about creating a European fund with big amounts of money to use for resolution," Constancio said. "You can look to the example of the U.S., where the FDIC does this task."
The FDIC had dealt with more than 400 troubled banks since 2008 without using public money, Constancio said, adding that the resolution mechanism should not be used to bail out banks, which was the responsibility of governments.
"It's about bail-in - it's not about bailout - in order to minimise any possible contribution of public money to the resolution of banks. That's one of the lessons of the crisis," Constancio said.